JUNE 2017

Robert Gordon
Profiled P.28

What's Up
with Cash P.32

Capital
FINANCE AND DEVELOPMENT Slowdown P.36

Millennials
and the Future of Work

I N T E R N A T I O N A L M O N E T A R Y F U N D
Contents

Millennials are
increasingly
looking to find
their way in
the sharing
6
economy.

MILLENNIALS AND THE FUTURE OF WORK

4 An Uncertain Future 16 Education for Life
Along with exciting new possibilities, millennials face Labor markets are changing, and millennials
a whole different set of obstacles must prepare and adjust
Maureen Burke  Nagwa Riad
6 The Future of Work 20 Playing Catch-up
 The digital economy will sharply erode the traditional Youth today are not building wealth the way
employer-employee relationship their parents did
 Arun Sundararajan Lisa Dettling and Joanne W. Hsu

12 Straight Talk: The Voice of Youth 24 In Their Own Words

Adapt, adjust, and never stop learning Millennials reflect on the key challenges
 Christine Lagarde facing their generation
Niccole Braynen-Kimani and Maria Jovanović
14 Pension Shock
Young adults in advanced economies must take steps
to increase their retirement income security
 Mauricio Soto

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 FINANCE & DEVELOPMENT
A Quarterly Publication of the International Monetary Fund
June 2017 | Volume 54 | Number 2

DEPARTMENTS
28 People in Economics
Prophet of Pessimism
Chris Wellisz profiles Robert J. Gordon, who
predicts a slowdown in innovation will take a toll
on economic progress
44 Picture This
Fueling Reform
48 Energy subsidy reforms are challenging, but many
countries are making progress
ALSO IN THIS ISSUE Maria Jovanović
46 In the Trenches
32 Cash Is Dead, Long Live Cash
Virtual payments are fast displacing cash, but not Window of Opportunity
completely and not everywhere  Leszek Balcerowicz explains why it’s important
Alan Wheatley to move quickly when citizens are willing to
embrace change
36 Capital Slowdown
Investment growth in emerging market and 58 Book Reviews
developing economies has been sluggish since 2010 
Trading Barriers: Immigration and the Remaking of
 M. Ayhan Kose, Franziska Ohnsorge, and Lei Sandy Ye Globalization, Margaret E. Peters
40 When Money Can No Longer Travel 
The First Serious Optimist: A. C. Pigou and the Birth of
Correspondent banking relationships, which facilitate Welfare Economics, Ian Kumekawa
global trade and economic activity, have been under 60 Currency Notes
pressure in several countries
 Andreas Adriano A Pretty Peso
Colombia showcases its rich culture on the newest
48 Beyond the Headlines member of its family of banknotes
Migration from sub-Saharan Africa Nadya Saber
has far-ranging effects on home
and host countries alike
 Jesus Gonzalez-Garcia
and Montfort Mlachila
51 
From Hungry to Hefty
Obesity and diabetes threaten
emerging market economies, but
the right policies can help
Eduardo J. Gómez
54 Beating Back Ebola 51
Nimble action on the economic
front was key to overcoming the
health crisis
Mehmet Cangul, Carlo Sdralevich,
and Inderjit Sian
28
June 2017 | FINANCE & DEVELOPMENT 1
 EDITOR'S LETTER
FINANCE & DEVELOPMENT
A Quarterly Publication of the
International Monetary Fund

EDITOR-IN-CHIEF:
Camilla Lund Andersen
MANAGING EDITOR: Marina Primorac
SENIOR EDITORS:
Gita Bhatt James L. Rowe, Jr.
Jacqueline Deslauriers Rani Vedurumudi
Natalie Ramírez-Djumena Chris Wellisz
Nagwa Riad
ONLINE EDITOR: Marie Boursiquot
ASSISTANT EDITORS:
Bob Ahmed Bruce Edwards

Tomorrow's
Eszter Balázs Maria Jovanović
Niccole Braynen-Kimani Nadya Saber
Maureen Burke

Workplace PRINT/WEB PRODUCTION SPECIALIST: Lijun Li

EDITORIAL ASSISTANTS:
Suzanne Alavi Aisha Shaikh
IT SEEMS FITTING that we are launching our redesigned magazine with a COPY EDITOR: Lucy Morales
cover dedicated to millennials and the future of work. But while Finance ADVISORS TO THE EDITOR:
& Development has mainly changed its appearance, not its content, young Bernardin Akitoby Thomas Helbling
Celine Allard Tommaso Mancini Griffoli
adults may have to make more fundamental adjustments to keep pace with Bas Bakker Gian Maria Milesi-Ferretti
the requirements of tomorrow’s workplace. Steven Barnett Inci Otker-Robe
For a start, there is the changing nature of work itself. Whereas baby Nicoletta Batini Laura Papi
Helge Berger Catriona Purfield
boomers and Generation Xers stood a good chance of landing a regular Paul Cashin Uma Ramakrishnan
full-time job with benefits (such as paid leave and a generous pension), Adrienne Cheasty Abdelhak Senhadji
today’s young people find it much harder, working instead in what has Luis Cubeddu Alison Stuart
Alfredo Cuevas
been dubbed the “sharing economy.” About 40 percent of independent
workers in the United States who make a living as freelancers are millennials, © 2017 by the International Monetary Fund. All rights reserved.
For permission to reproduce any F&D content, submit a request
according to New York University professor Arun Sundararajan. via online form (www.imf.org/external/terms.htm) or by e-mail
Then there is the fact that millennials got their timing horribly wrong, to copyright@imf.org. Permission for commercial purposes also
as they began to enter the workforce during the most severe global economic available from the Copyright Clearance Center
(www.copyright.com) for a nominal fee.
crisis since the Great Depression. In many countries, youth unemployment
Opinions expressed in articles and other materials are those of
spiked at over 20 percent of the workforce, and it remains stubbornly high. the authors; they do not necessarily reflect IMF policy.
And technology is a double-edged sword for millennials. The digital
Subscriber services, Changes of address, and
economy has enabled the creation of millions of new jobs, but artificial Advertising inquiries:
intelligence and robotics may soon displace even complex human activities IMF Publication Services
such as driving a car, providing health care, and giving legal advice. Finance & Development
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What to make of it all? We asked millennials around the world. One of Washington, DC, 20090, USA
them, Kathy Gong of China, captured the spirit of optimism—coupled Telephone: (202) 623-7430
with fierce determination to create a better society—that drives many Fax: (202) 623-7201
E-mail: publications@imf.org
millennials. “Our future depends on the young people because they are at
Postmaster: send changes of address to Finance & Development,
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ment,” she says. Gen Xers and baby boomers, please step aside. at additional mailing offices.
The English ­edition is printed at Dartmouth Printing Company,
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CAMILLA LUND ANDERSEN, Editor-in-Chief
Finance & Development is
published quarterly by the
International Monetary Fund, 700
JUNE 2017

Robert Gordon
Profiled P.28
19th Street NW, Washington, DC
What's Up
with Cash P.32

Capital
20431, in English, Arabic, Chinese,
French, Russian, and Spanish.
FINANCE AND DEVELOPMENT Slowdown P.36

English edition ISSN 0145-1707

ON THE COVER
Michael Waraksa is known for his botanical and zoological collages. On the cover of
Millennials this issue, which sports F&D's first redesign in 10 years, Waraksa portrays millennials as
and the Future of Work

I N

C1-5_FOB_P5.indd 1
T E R N A T I O N A L M O N E T A R Y F U N D

5/11/17 5:43 PM
butterflies exploring their prospects in the changing work landscape.

2 FINANCE & DEVELOPMENT | June 2017

 June 2017 | FINANCE & DEVELOPMENT 3
4 FINANCE & DEVELOPMENT | June 2017
An Uncertain Future
Along with exciting new possibilities, millennials face a whole different set of obstacles
Maureen Burke
MILLENNIALS ARE ENTERING the workforce at a time
of technological change and economic disruption.
These forces are shaping the choices they make and
the experiences they seek—even as this generation
in turn shapes the global economy.
Born between 1980 and 2000, millennials are
the largest generation in the modern era. While
their elders—the baby boomers and the Gen
Xers—are digital immigrants, millennials are true
digital natives, with an instinctual feel for the latest
technology. Technology is second nature to them—
yet many worry that their jobs may one day be
taken by a robot.
Millennials are increasingly looking to find their
way in the sharing economy, a phenomenon made
possible by the emergence of digital platforms that
facilitate the matching of buyer and seller. Jobs in
the sharing economy—like driving for Uber or
Lyft—help some millennials make ends meet, even
if such temporary gigs are a far cry from the full-
time jobs with traditional pension plans and other
benefits their parents often enjoyed.
This generation also enthusiastically embraces
the services of the sharing economy, which provides
access to everything from beds to cars to boats
without the hassle of ownership. Loath to buy
big-ticket items such as cars and houses, millennials
have sharply different spending habits from those
of preceding generations.
Is this a rejection of materialism—or simply a
sign of insufficient resources? Or both? While
young people are optimistic about the future, they
are struggling to get jobs. And average incomes
for today’s young workers, at least in the United
States, are lower than they were in 1975. The real
(after-inflation) income for young American work-
ers is 5.5 percent lower than it was four decades
ago, according to the U.S. Census Bureau.
Millennials confront obstacles to prosperity that
their parents didn’t face. They are better educated
than previous generations—but in today’s world,
that is not enough to guarantee financial success.
Many, if not most, will be forced to retool and
switch careers several times during their working
life. While formal schooling remains the primary
source of learning, educational systems must arm
millennials and succeeding generations with skill
sets for jobs that do not yet exist.
And whatever the jobs of the future turn out
to be, this generation may need to keep doing
them for longer than they think. As populations
age and governments try to contain burgeoning
pension costs, millennials face the prospect of
having to work more years and save more for
retirement to achieve the same standard of living
as today’s retirees.
This issue of F&D examines the economic oppor-
tunities and challenges of millennials, who will
try to earn a living in a work world decidedly
different from the one their parents inhabited.
MAUREEN BURKE is on the staff of Finance & Development.
June 2017 | FINANCE & DEVELOPMENT 5
6
FINANCE & DEVELOPMENT | June 2017
ART: SHUTTERSTOCK / MAVERICK_INFANTA
 THE
FUTURE OF
WORK
The digital economy will sharply erode the traditional employer-employee relationship
Arun Sundararajan
F
or today’s youth, the future of work may be
more uncertain than ever.
The confluence of two digital forces will
dramatically reshape tomorrow’s workplace,
leading to a sharp reduction in the traditional
employer-employee relationship. New platforms
allow economic activity to be organized in ways that
shift much of what was traditionally accomplished
by full-time workers within an organization to a
crowd of individual entrepreneurs and on-demand
workers. The result is an economy that increasingly
relies on short-term freelance relationships rather
than on full-time employment.
At the same time, artificial intelligence and robotics-
enabled technologies are getting increasingly better
at the cognitive and physical tasks that comprise
much of today’s work, presaging the automation
of complex human activities like driving a vehicle
or managing a project and disrupting a range of
occupations that include law, consulting, retailing,
and transportation.
Job changes
The confluence of these two factors leads to a labor
market in which full-time jobs may be broken up into
tasks and projects. This will make it easier to substitute
capital in the form of automation technologies for
human labor and talent, a trend that will be reinforced
by the diminishing power of labor unions.
Society and government will have to keep pace
with these changes in work arrangements. To avoid
further increases in the income and wealth inequal-
ity that stem from the sustained concentration of
capital over the past 50 years, we must aim for a
future of crowd-based capitalism in which most of
the workforce shifts from a full-time job as a talent
or labor provider to running a business of one—in
effect a microentrepreneur who owns a tiny slice
of society’s capital.
As fewer people earn a living in the way now
considered traditional and many, if not most, face
changes several times during their careers, the empha-
sis of education must also shift (see “Education for
Life,” in this issue of F&D). Instead of focusing
primarily on two- or four-year postsecondary insti-
tutions that educate early in life, as we did in the
20th century, society must create robust educational
institutions that help workers make midcareer tran-
sitions. Moreover, the largely employer-funded
portion of the social safety net—which often includes
medical insurance, paid vacation time, workplace
insurance, retirement contributions, and predictable
salaries that stabilize earnings—must be rethought
in an era of greater individual entrepreneurship.
June 2017 | FINANCE & DEVELOPMENT 7
 Several studies over the past two years have doc-
umented a rise in the nonemployment labor force:
people who derive their primary or supplemental
income from freelance arrangements. Estimates of
the total number of such independent workers in
the United States range from 40 million to 68 million
(see Chart 1). The variation reflects different defi-
nitions and methods; nevertheless, both the high
and low estimates demonstrate that independent
workers represent a significant fraction of the coun-
try’s civilian labor force of 160 million people.
The tendency to pursue nonemployment work is
more pronounced among younger people. For exam-
ple, 40 percent of independent workers who make
their primary income this way are millennials, com-
pared with about a third of the overall civilian work-
force, according to a survey by MBO Partners.
The emergence of numerous digital platforms that
facilitate earning nonemployment income is likely
to accelerate this trend. Many of these platforms
commercialize personal assets by putting them to
more productive use. These include transportation
platforms (like Uber and Lyft in the United States,
Didi Chuxing in China, BlaBlaCar in France, Ola
in India, and Grab in southeast Asia); those like
Airbnb that enable individuals (over 3 million at the
end of 2016) to run a commercial short-term accom-
modation business in their home, and peer-to-peer
Chart 1
Independent employment
Four recent major studies found that a sizable portion of the 160
million US workers earn income by working freelance.
McKinsey Global Institute
Freelancers Union and
Upwork
MBO Partners
Primary income
Katz and Krueger Secondary income
0 20 40 60
Number of independent US workers (millions)
Sources: Katz, Lawrence F., and Alan B. Krueger. 2016. “The Rise and Nature
of Alternative Work Arrangements in the United States, 1995–2015” (RAND);
MBO Partners. 2016. “State of Independence in America,” Herndon, VA;
Freelancers Union and Upwork. 2016. “Freelancing in America 2016”; and
McKinsey Global Institute. 2016. “Independent Work: Choice, Necessity, and
the Gig Economy.”
Note: In general, independent workers derive all or some of their income
from freelance arrangements. The precise definition of independent worker
varies from study to study.
8 FINANCE & DEVELOPMENT | June 2017
car rental platforms like Drivy in Europe and Getar-
ound in the United States. They also include a
growing number of on-demand and freelance labor
platforms like Upwork, which operates globally and
has more than 12 million registered freelancers offer-
ing skills ranging from administration and customer
service to web development and accounting; coun-
try-specific platforms like CrowdWorks in Japan
(over a million workers) and Giraffe in South Africa;
and sector-specific professional labor platforms like
Catalant for management consulting, Gigster for
high-end software development, and UpCounsel
for legal services.
A November 2016 JPMorgan Chase Institute
study documents the change: at the end of 2013
about 0.5 percent of US adults had earned non-
employment income via such platforms; by mid-
2016, that number had grown to 4 percent.
Although there are no comparable global estimates,
an October 2016 study by the McKinsey Global
Institute documented a similar percentage: about
4 percent across France, Germany, Spain, Sweden,
and the United Kingdom. Nonemployment work
arrangements will expand further in coming years
as sector-specific professional labor platforms pro-
liferate, possibly taking full-time jobs out of com-
panies and converting them into sets of projects or
tasks. That will shift the source of commercial trust
toward digital systems and increase the role for new
enterprise software from companies like WorkMar-
ket and SAP that manage complex on-demand
task-based workflows.
The second machine age
Concerns about this on-demand technological
onslaught on full-time employment are exacerbated
by growing worries about labor automation made
possible by advances in artificial intelligence and
robotics. Of course, fears of technological unem-
ployment are hardly new. In the so-called Luddite
labor riots between 1811 and 1816 in Britain, textile
80 workers destroyed weaving machinery they believed
would replace their role in production.
A report titled “Technology and the American
Economy,” prepared for the US president by the
National Commission on Technology, Automation
and Economic Progress, voiced similar concerns:
“The fear has even been expressed by some that
technological change would in the near future not
only cause increasingly unemployment, but that
eventually it would eliminate all but a few jobs, with

the major portion of what we now call work being
performed automatically by machine.”
This report was not prepared for President Barack
Obama in 2016. Rather, it was presented to President
Lyndon Johnson 50 years earlier. And although
exaggerated in its prognosis, it was accurate about
the long-term source of manufacturing job losses.
Although US manufacturing employment continued
to rise in the decade following this report, peaking
at close to 20 million jobs in the late 1970s, it began
to fall soon after. Manufacturing jobs represented
22 percent of nonfarm payroll employment in 1977.
In contrast, the 12 million manufacturing jobs today
account for less than 10 percent of nonfarm payrolls.
Although it is difficult to precisely disentangle trade
effects from those of technological change, many
believe that those US manufacturing job losses over
the past 15 years reflect factory automation more
than companies shifting production to low-cost
foreign operations. In fact, even as jobs were declin-
ing, US manufacturing output was growing. As
robotics technologies continue to improve, automa-
tion may be even more ominous for China, where
urban manufacturing employment was at a massive
80 million in 2014, a level bound to drop steeply
in coming decades.
Perhaps what strikes greater fear than manufac-
turing automation among today’s youth is the specter
of the “second machine age” predicted by Erik Bryn-
jolfsson and Andrew McAfee in their 2014 book,
in which technologies start to perform the cognitive
tasks once the exclusive domain of humans. IBM’s
Watson technology promises artificial-intelligence-
powered solutions for financial compliance, medical
diagnostics, and legal services. Self-checkout counters
at a growing number of retail stores already replace
cashiers. Self-driving automobile technologies seem
poised to threaten tens of millions of trucking jobs
globally. These professions span the expertise spec-
trum, which portends a slowing or perhaps even
reversal of wage increases for high-skill work that
have accompanied skill-biased technical change in
past decades. Furthermore, many worry that if
machines go beyond automating physical labor and
start to absorb the demand for cognitive capabilities
as well, little will be left for humans to do.
A glance at the history of job displacement from
automation provides some context and reassurance.
As farming was steadily mechanized in the United
States, the share of the workforce employed in
agriculture fell from 41 percent in 1900 to less
MILLENNIALS AT WORK
than 2 percent in 2000. Yet the specter of econo-
my-wide unemployment did not materialize.
Rather, progress in the underlying technologies
themselves spawned new industries. As David
Autor pointed out in a 2015 article in the Journal
of Economic Perspectives, as passenger cars displaced
equestrian travel and its supporting industries, the
automobile industry emerged—along with high-
ways, gas stations, the roadside motel, and fast-food
outlets. The broader point is that even as old
industries shrink or disappear, new ones that fulfill
different human desires and needs emerge and
expand. The health care sector, virtually nonexis-
tent 200 years ago, accounts for about 12 percent
of US employment today (see Chart 2). Tourism,
barely an industry in 1900, employed 235 million
people in 2011, constituting 8 percent of global
employment. A pattern has emerged of activities
even as old industries
shrink or disappear, new
ones that fulfill different
human desires and needs
emerge and expand.
once informal or done within the household or
local community (like communication, entertain-
ment, travel, education, or tending to the ill)
becoming industries in the formal economy.
As the labor demands of industries that fulfill
contemporary societal needs are automated by new
technologies, people will be free to fulfill underserved
human aspirations or new societal needs. Perhaps
economic activity to counter climate change will
scale up dramatically—or to educate the world or
formalize the care economy.
Crowd-based capitalism
So the myriad projections about the big chunk of
today’s jobs that might be amenable to automation
in coming decades are not cause for widespread and
immediate panic. But the confluence of the twin
forces of rising nonemployment work and the
increasing cognitive capabilities of machines could
call for a change in society’s model of earning a living.
This is because the labor displacement effects of
automation are moderated by differences in how
quickly it lowers the cost of doing different tasks
June 2017 | FINANCE & DEVELOPMENT 9
MILLENNIALS AT WORK
Sunararajan, 3/29/17
Chart 2
Changing faces of jobs
Even as traditional manufacturing jobs in the United States declined
over the past 15 years, employment in health care, which hardly existed
as an industry a century ago, climbed sharply.
(millions of workers)
20
Health care and
social assistance
15
Manufacturing
10
5 markets, and raise its standard of living by building
1990 95 2000 05 10 15
Source: US Bureau of Labor Statistics.
that comprise a job. If organizations start to unbundle
jobs and farm out tasks to on-demand labor plat-
forms, the effect will be faster automation of such
tasks when the technology is ready.
One solution is to redefine our basic model of
how people earn a living: away from payment for
labor and talent by a large organization that owns
the capital associated with the economic activity and
toward a system of tiny businesses that mix labor,
talent, and capital inputs. Some inputs might come
from the individuals themselves and some from other
humans (perhaps via an on-demand platform); over
time, a growing share might come from artificial
intelligence and robotics technologies.
The emergence of sharing economy and other
professional services platforms makes this future
of crowd-based capitalism feasible at scale. Perhaps
the best example is Airbnb, which matches owners
of spare space with those seeking temporary quar-
ters. By many measures, it is the world’s single
largest provider of short-term accommodations.
(On December 31, 2016, more than 2 million
people around the globe were staying in Airbnb
housing. The world’s largest hotel chain, Marri-
ott-Starwood, has an inventory of roughly half
that, or 1.1 million rooms.) Airbnb gathers demand
for space, provides the reassurance that comes with
a global brand, and sets and enforces some stan-
dards (almost like a next generation franchising
operation). But the actual running of the businesses
that provide the short-term accommodations—the
10 FINANCE & DEVELOPMENT | June 2017
pricing, inventory management, positioning, mer-
chandising, customer interaction—is done by the
3 million hosts, who build their own microbrands
through Airbnb’s reputation system.
Airbnb could be a microcosm of the future of
work—relatively immune to the displacement effects
of automation. In younger and faster-growing econ-
omies, like those of Brazil, India, and Vietnam—
where full-time institutional employment is not yet
dominant and traditional economic institutions vary
in effectiveness—platforms with robust digital trust
systems that match demand for services with sup-
pliers could stimulate a self-employed and entrepre-
neurial population, empower it to reach global
individual capital. In more mature economies, like
Japan, the United Kingdom, and the United States,
which now rely primarily on full-time formal
employment, such a model could maintain reason-
able levels of individual income. In essence, these
changes could partially insulate the workforce from
higher capital-labor substitution because of auto-
mation by helping today’s workers make the transi-
tion from labor provider to capital owner.
In the future, today’s aspiring law associate might
instead be a tiny law firm that operates through a
legal services platform. That would give the young
lawyer access to corporate clients the platform aggre-
gates and cultivates while leveraging artificial-intel-
ligence-enabled legal research capabilities. Microen-
trepreneurs might run urban transportation or local
trucking businesses using fleets of autonomous cars
or trucks through a platform. A global consulting
firm might evolve into a platform through which
millions of individuals run microconsulting practices
(or even small partnerships).
Rethinking education
Such a future of large-scale crowd-based capitalism
will require fundamental rethinking of postsecondary
education. Countries around the world, most prom-
inently the United States, have invested heavily in
universities and colleges that prepare their workforces
early in life for a career of full-time employment.
Much of this focus must shift toward dramatically
increasing the availability and quality of continuing
education. Recent political developments in the
United States and the United Kingdom reflect in part
significant underinvestment in new opportunities for
workers displaced by automation and ill equipped for
a new world of work. To help those workers, new

university-like institutions are needed to provide
structured and pedagogically sound transition edu-
cation. The instruction should be accompanied by a
new professional network and access to new oppor-
tunities that help overcome the housing, credit, and
community factors that often impede relocation to
pursue a new career. Such an approach would give
workers in flux a new identity and sense of purpose
and enable them to rebuild their self-worth. Seeking
this sort of midcareer intervention should be as natural
as choosing to go to college after high school.
The government of a country must lead the cre-
ation of such a system. It may also be prudent to
reevaluate middle and high school curricula for the
next generation. As the cognitive capabilities of
digital machines expand, students may need less
education in science, technology, engineering, and
math and may benefit from a greater emphasis on
design thinking, entrepreneurship, and creativity to
prepare them for a microentrepreneurial career.
At the same time, the social contract must be
refashioned to accommodate a different kind of
workforce. During the second half of the 20th
century, a variety of labor laws were developed to
improve the quality of work life for full-time
employees—including minimum wages, overtime,
and insurance. Funding for a number of other
incentives—stable salaries, paid vacation time,
workplace training, and health care—in many
countries is based on an assumption of full-time
employment and on the employer providing all or
part of the incentive. The design and funding of
tomorrow’s social safety net must be adapted for a
workforce that is increasingly independent. At the
PHOTO: RUSSELL HART/ALAMY STOCK PHOTO
A man uses the Airbnb smartphone app.
same time, substitutes are needed for the career
paths and sense of community many workers now
get from the company they work for. Perhaps the
role of the postsecondary schools will evolve to
include this kind of lifelong career planning.
The challenges facing today’s millennial workforce
seem quite daunting. However, if society plays its
cards right, tomorrow may offer a better place. As
we have learned from Thomas Piketty his 2014 book,
Capital in the Twenty-First Century, the most import-
ant driver of sustained inequality in modern econo-
mies is the concentration of capital ownership.
The social contract
must be refashioned to
accommodate a different
kind of workforce.
Countries whose government policy steers an econ-
omy toward a future of genuine crowd-based capital-
ism and creates authentically decentralized capital
ownership may also enjoy less inequality as a happy
by-product. As digital machines compel us to reshape
our world of work, perhaps they will also show us a
path toward the more equitable society we’ve been
seeking for years.
ARUN SUNDARARAJAN is a professor at the Stern School
of Business, New York University, and author of The Sharing
Economy: The End of Employment and the Rise of Crowd-
Based Capitalism.
June 2017 | FINANCE & DEVELOPMENT 11
 STRAIGHT TALK
The Voice of Youth
Adapt, adjust, and never stop learning
Christine Lagarde
THE OLD, as Oscar Wilde once remarked, believe
everything; the middle-aged suspect everything;
the young know everything.
That’s why I appreciate hearing young voices—
from students, to budding entrepreneurs, to fresh-
faced community leaders. Their stories resonate
with me because they are deeply felt, insightful,
and inspiring.
Like those of everyone, young people’s concerns
vary by region and culture. But there are some
questions that I hear nearly everywhere I go: can
I find meaningful work that allows me to help my
community and support my family? Is there a place
for me in my own society? Can I start my own
business—and if so, how successful will it be?
There is much hope and excitement in these
questions, but they also convey a sense of doubt
and trepidation—and for good reason. Unfortu-
nately, young people today are twice as likely to be
unemployed as the general population.
In France, for example, youth unemployment is
nearly 20 percent, while overall unemployment is
about 10 percent, with Brazil and Egypt facing
similar problems. Around the world, youth
12 FINANCE & DEVELOPMENT | June 2017
PHOTO: IMF PHOTO
unemployment will reach 71 million this year,
according to ILO estimates.
To make matters more complicated, young
people who do find work are facing rapid techno-
logical disruptions that could eliminate their new-
found industries. This transformation leaves every-
one—especially young workers—guessing which
jobs will still be around a decade from now and
how they can train themselves to adapt.
Ready to adapt
Fortunately, young people have the tools in hand
to prepare themselves for the tectonic shift that
is underway.
In my conversations, I quickly pick up on the
fact that this generation operates on a steep learning
curve. Many students now embrace the idea of
continuous training and take it as a given that they
must add skills throughout their lives.
I have seen firsthand the incredible resourceful-
ness of millennials as they try to take control of
their future. Many are not willing to wait for a job
in the civil service or in a large company. They
strike out and start their own businesses. They
devise new online platforms and discover markets
that previously did not exist. What I see is a gen-
eration that, if faced with unemployment, innovates
to create fresh opportunities.
But this approach alone is not enough. Gov-
ernments have a responsibility to build an envi-
ronment that allows young people to fully realize

their potential. This means breaking down reg-
ulatory barriers, supporting entrepreneurs who
may not succeed on their first attempt, and invest-
ing in mentorship across generations. How can
this be done?
Tailored approach
There is no magic formula that works in all countries,
but I see several practical solutions. One is structured
vocational training, which has kept youth unem-
ployment low in countries such as Austria, Germany,
and the Netherlands. Another solution is giving
young women better access to child care centers and
flexible maternity benefits. These efforts can rein-
vigorate labor markets.
Take for example Mali, where the IMF has
emphasized the economic benefits of girls’ educa-
tion. Or Mauritius, where we are examining ways
of expanding women’s access to finance.
In certain countries, a 10 percentage point
decrease in gender inequality could boost growth
by 2 percentage points over the next five years.
At the same time, our member nations need to
remove barriers to competition and cut red tape.
These reforms must of course be country spe-
cific—in advanced economies, we estimate that
if research and development were increased by
40 percent, nations could grow GDP by 5 percent
in the long term.
All these changes would benefit youth just
embarking on their careers.
Smart policy choices can liberate young people to
work for themselves or start a company. At the same
time, young entrepreneurs face increased financial
uncertainty because they can no longer rely on
employer-based health insurance or pension plans.
How can the IMF help?
IMF work
Our mission at the IMF is to promote economic
stability and growth around the world. And that
means helping our member countries create better
employment opportunities for the next generation
of workers.
This is particularly important in countries
where youth unemployment has remained high
over many decades.
The IMF can help address these challenges by
encouraging greater public investment in education
and job training programs—and we are pushing
for such reforms in our lending programs.
MILLENNIALS AT WORK
We also need more public-private partnerships
that can make training programs more effective. A
good example is Singapore’s Skills Future program,
which offers unconditional grants to all adults for
training throughout their working lives.
But training is only one piece of the puzzle. There
is so much more that governments and business
can do to harness the power of innovation. Fintech,
for example, is a fascinating field where more invest-
ment is needed.
Just look at Kenya and the innovative use of mobile-
phone-based money transfer through M-Pesa. The
government now permits phone-based payment of
taxes, reducing compliance costs and delays.
The world cannot afford to waste
so much precious human talent.
Some studies estimate that developing and emerg-
ing market economies can save $110 billion annu-
ally by switching from cash and checks to digital
payments. These savings can make all the difference
when a young person is on the verge of starting a
new business.
A career in the 21st century
If I were entering the job market today, I would
focus on two things. First, a willingness to learn
throughout your life. There is no “end” to education;
there are simply milestones of progress.
Second, an openness to changing course. You do
not have the luxury of being trained in one field
or one profession only. In my life, I started as a
lawyer, became a finance minister, and now lead
the IMF. The generation about to enter the work-
force will face even more twists and turns on their
professional journey. Embrace those changes and
bring new perspective gained from each position
into the next.
Returning to Wilde, he said, “To define is to
limit.” There is no precise definition of what a career
or job will look like for the world’s youth in the new
economy. This opacity leads to understandable
anxiety and uncertainty. At the same time, there is
no limit to the possibilities. This is the great oppor-
tunity for the next generation, and I trust the entire
global community will help them seize it.
CHRISTINE LAGARDE is the managing director of the IMF.
June 2017 | FINANCE & DEVELOPMENT 13
 PENSION
SHOCK
Young adults in advanced economies must take
steps to increase their retirement income security
Mauricio Soto
P
ublic pensions have played a crucial role
in ensuring retirement income security
over the past few decades. But for the
millennial generation coming of working
age now, the prospect is that public pensions won’t
provide as large a safety net as they did to earlier
generations. As a result, millennials should take
steps to supplement their retirement income.
Pensions and other types of public transfers have
long been an important source of income for the
elderly, accounting for more than 60 percent of their
income in countries that are members of the
Organisation for Economic Co-operation and
Development (OECD). Pensions also reduce poverty.
Without them, poverty rates among those over 65
also would be much higher in advanced economies.
Pressure on pensions
But pensions are also costly to provide. Government
spending on pensions has been increasing in advanced
economies from an average of 4 percent of GDP in
1970 to close to 9 percent in 2015––largely reflecting
population aging (see Chart 1, left panel).
Population aging puts pressure on pension
systems by increasing the ratio of elderly benefi-
ciaries to younger workers, who typically contribute
to funding these benefits. The pressure on retire-
ment systems is exacerbated by increasing longev-
ity—life expectancy at age 65 is projected to increase
by about one year a decade.
14 FINANCE & DEVELOPMENT | June 2017
To deal with the costs of aging, many countries
have initiated significant pension reforms, aiming
largely at containing the growth in the number of
pensioners—typically by increasing retirement ages
or tightening eligibility rules—and reducing the
size of pensions, usually by adjusting benefit for-
mulas. Since the 1980s, public pension expenditure
per elderly person as a percent of income per
capita—the so-called economic replacement rate––
has been about 35 percent. But that replacement
rate is projected to decline to less than 20 percent
by 2060 (see Chart 1, right panel).
This means that younger generations will have
to work longer and save more for retirement to
achieve replacement rates similar to those of today’s
retirees (see Chart 2):
• Working longer: To close the gap in the economic
replacement rate relative to today’s retirees, one
option for younger individuals is to lengthen their
productive work lives. For those born between
1990 and 2009, who will start to retire in 2055,
increasing retirement ages by five years—from
today’s average of 63 to 68 in 2060—would close
PHOTO: ISTOCK / BRIANAJACKSON / BILL OXFORD
half of the gap relative to today’s retirees. A longer
work life can be justified by increased longevity.
But prolonging work lives also has many benefits.
It enhances long-term economic growth and helps
governments’ ability to sustain tax and spending
policies. Working longer can also help people
maintain their physical, mental, and cognitive
 MILLENNIALS AT WORK

Chart 1
Costly and inadequate
In advanced economies, pension spending as a percent of GDP is rising while
pension expenditure per elderly person as a percent of income per capita
(the economic replacement rate) soon will fall.
health (Staudinger and others 2016). However, (percent of GDP) (percent)
efforts to promote longer work lives should be
10 40
accompanied by adequate provisions to protect
the poor, whose life expectancy tends to be shorter 8
30
than average (Chetty and others 2016).
• Saving more: Simulations suggest that if those 6
20
born between 1990 and 2009 put aside about 6 4
percent of their earnings each year, they would
10
close half of the gap in economic replacement 2
rate relative to today’s retirees. In practice, relying
0 0
on people’s private savings for retirement requires 1970 90 2010 30 50 1970 90 2010 30 50
a hard-to-achieve mix of fortune and savvy. First, Pension spending Economic replacement rate
individuals need continuous and stable earnings Sources: Organisation for Economic Co-operation and Development; United Nations; and
IMF staff calculations.
over their careers to be able to save sufficient Note: The economic replacement rate is average pension spending per individual 65 and
amounts. Second, workers would have to be able older divided by GDP per capita for those ages 15–64. Data after 2015 are projections.

to decide how much to put aside each year and

how to invest their savings. Third, the risks from
uncertain or low returns are borne by individuals.
Finally, workers would have to decide how fast Chart 2
to consume their savings during retirement. Preparing for the future
These are all complex decisions, and people can Today’s workers in advanced economies can work longer and save more to
make mistakes at each step along the way offset the declines in the value of future pensions.
(Munnel and Sundén 2004). (additional savings,
(additional years of work) percent of annual earnings)

Time to cope
For younger generations, acting early is crucial to
ensure retirement income security, especially because
longevity gains are projected to continue. As mil-
lennials start to enter the workforce, retirement might
be the last thing on their mind. But with many
governments retrenching their role in providing
retirement income, younger workers need to work
longer and step up their retirement savings.
Governments can make it easier for individuals
to remain in the workforce at older ages by review-
ing taxes and benefits that might favor early retire-
ment. Nudges to encourage workers to save can
also help, for example by automatically enrolling
them in private retirement saving plans. For
example, starting in 2018, the United Kingdom
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
Working longer Saving more
Those born 1950–69
Those born 1970–89
Those born 1990–2009
Source: IMF staff calculations.
Note: The calculations represent per age group the additional years of work needed to
close half of the gap in the economic replacement rate and the additional savings
required to close the other half. The economic replacement rate is the average pension
spending per individual 65 and older divided by GDP per capita for those ages 15–64.

will require employers to automatically enroll

workers in a pension program. Boosting financial
literacy and making the workplace more friendly
to older workers can also be part of the solution.
The good news for younger workers is that retire-
ment is some four decades away, allowing time to
plan for longer careers and to put money aside for
later. But they must start now.
MAURICIO SOTO is a senior economist in the IMF’s Fiscal
Affairs Department.
References:
Chetty, Raj, and others. 2016. “The Association Between Income and Life Expectancy in
the United States, 2001–2014.” JAMA 315 (16): 1750–766.
Munnell, Alicia H., and Annika Sundén. 2004. Coming Up Short: The Challenge of 401(k)
Plans. Washington, DC: Brookings Institution Press.
Staudinger, Ursula M., and others. 2016. “A Global View on the Effects of Work on Health
in Later Life.” Gerontologist 56 (Suppl 2): S281–92.

June 2017 | FINANCE & DEVELOPMENT 15

EDUCATION
for LIFE
Labor markets are changing, and millennials
must prepare and adjust
Nagwa Riad

16 FINANCE & DEVELOPMENT | June 2017


O
ne in three people around the world
was born between 1980 and the early
2000s. Most of these millennials are
in the workforce. Yet their work future won’t
look much like the world of their parents.
Technological advancement is transforming
the way we live and the way we work. Although
previous generations may have experienced
significant technological changes, millennials
likely will have to cope with much faster dis-
ruption. This means that many, if not most,
will need to retool and learn new skills several
times during their working life.
The implications for education are critical.
The 2016 World Economic Forum Future of
Jobs report estimates that up to 65 percent of
children entering primary school today are
likely to work in jobs that do not yet exist. So
not only must education adapt to the needs
and attributes of future workers, it must also
anticipate and prepare them with the skills to
flourish in an evolving workplace. Only then
can the race between humans and machines
give way to collaboration that harnesses
the power of technology to benefit
individuals and societies.
Changing workplace
Technology is already changing indus-
tries and occupations in many
countries. Some of the most
in-demand jobs were not
even around 10 years
ago. Think app devel-
oper jobs, which
emerged with the advent
of smartphones, or the cloud
computing of more than half of
US businesses. Evans Data Corpora-
tion estimates that there were 12 million
mobile application developers in 2016—by
2020 there are expected to be 14 million.
Developments in previously disjointed fields
are merging and amplifying each other. Arti-
ficial intelligence and self-teaching computer
programs that replicate human skills are com-
ART: SHUTTERSTOCK / YAYASYA
bining with other technologies, such as sensors,
to produce self-driving cars and trucks. Such
innovations usually require a parallel trans-
formation in workers’ skills to implement the
new technology and business models.
MILLENNIALS AT WORK
David Autor and others at the Massachu-
setts Institute of Technology find that the
demand for higher-order cognitive skills—
including numeracy, literacy, and problem
solving in technology-rich environments—
increases with an economy’s technological
sophistication. In the United States, the
surge in demand for nonroutine jobs between
1980 and 2000 coincided with greater invest-
ment in the knowledge economy’s infra-
structure; demand for routine and manual
jobs declined steadily (see chart). This shift
will only accelerate.
These trends are not unique to the United
States nor to millennials. Technology is also
causing job dislocation elsewhere in the world
and affects many age groups. Between 1991
and 2014, the share of income going to
labor—as opposed to owners of capital—
declined in 29 of the largest 50 economies,
according to the IMF’s April 2017 World
Economic Outlook. Middle-skilled labor (most
likely baby boomers) experienced the sharpest
declines in income share, especially in
advanced economies and in easily automated
sectors such as manufacturing, transportation,
and communications. Technology in partic-
ular accounted for about half of the decline
in advanced economies.
A knowledge economy
A closer look at employment trends in science,
technology, engineering, and math (STEM)
occupations in the United States confirms
that there is a premium associated with the
higher-order skills needed in a knowledge-
based economy. According to the Census
Bureau, close to 9 million workers were
employed in STEM occupations in the
United States in 2015, representing more than
6 percent of workers. These workers also
earned 29 percent more than their non-
STEM counterparts—an advantage that
increased from 26 percent in 2010.
STEM employment growth has outpaced
that of non-STEM occupations over the past
decade, at 24 percent and 4 percent, respec-
tively. This trend is expected to continue,
with STEM occupations projected to grow
9 percent between 2014 and 2024 compared
with about 6 percent for other jobs.
June 2017 | FINANCE & DEVELOPMENT 17

Out of the ordinary
Demand for nonroutine analytical and interpersonal skills continues to
rise in the US labor market, while that for manual and routine tasks falls
or stagnates.
(mean task input, variation from 1960)
70
65
Nonroutine analytical
60
Nonroutine interpersonal
55 Routine cognitive
Routine manual
50 Nonroutine manual
45
40
35
1960 70 80 90 98−2000 06 09
Source: Autor, David, and Brendan Price. 2013. “The Changing Task Composition
of the US Labor Market: An Update of Autor, Levy and Murnane.” MIT Working
Paper, Massachusetts Institute of Technology, Cambridge, MA.
While cognitive skills are necessary, they are not
all it takes. Soft skills such as teamwork, creativity,
adaptability, and social and cultural awareness are
just as important. Harvard education and econom-
ics professor David Deming finds the strongest job
and wage growth in positions that require both
hard cognitive skills and soft social skills.
Think of tasks such as management consulting
or health care and legal services. These occupations
require basic cognitive skills, but they also demand
significant human interaction, which cannot be
replicated by machines. The jobs of the future will
marry science and art, so that humans can work
with machines not against them.
In the workplace
But it seems clear that society is not sufficiently
preparing workers for the new reality. Millennials
as a group feel underprepared for the challenges of
the new workplace. A 2017 survey of 8,000 working
millennials across 30 countries by consulting com-
pany Deloitte found that many did not think
college had equipped them with the full
range of skills, personal qualities,
and experience today’s businesses
are seeking. This finding is echoed
in a study by McKinsey: 30 percent
of graduates surveyed in the United
States felt underprepared for the world of
work. Employers agreed.
A knowledge- and technology-intensive econ-
omy depends on an educational system that prepares
18 FINANCE & DEVELOPMENT | June 2017
students not only to use and complement technology
but also to innovate. Studies using standardized
competency and proficiency results suggest that some
countries may be better prepared than others.
The Organisation for Economic Co-operation
and Development (OECD) 2015 Program for Inter-
national Student Assessment took a deeper look at
students’ proficiency in science, reading, and math-
ematics in 42 countries. Singapore was the top
performer across all three subjects, followed by Japan,
Estonia, and Taipei. US scores were at the OECD
average in science and reading and below average in
mathematics. Still, the United States has more than
a fifth of the global population of top-performing
15-year-old students.
In a world of massive information flows and
rapid change, the workforce of the future will need
a well-aligned skill set to keep up. An understanding
of science and science-based technology is no longer
the domain of scientists; it is essential for any citizen
to make informed decisions in everyday life and to
foster a culture of lifelong learning.
At the same time, a growing body of literature
suggests that information and communication tech-
nology has shifted job design within occupations
toward arrangements that favor team production, and
therefore workers with social skills. A 2016 World
Economic Forum report estimates that five years from
now, more than a third of skills considered important
today will no longer be relevant. Creativity and emo-
tional intelligence will be among the top three needed.
Hard cognitive and social skills have always been at
play, but the balance is likely to shift in favor of the
latter for 21st century workers.
Where learning begins
Clearly, skills—both cognitive and soft—are devel-
oped in a variety of settings and evolve with age. But
formal education remains the primary source of
learning. The challenge here is for the education system
to equip students with skills for jobs that do not yet
exist. This requires a holistic approach to education
and lifelong learning built on a partnership between
academic institutions, employers, and government.
The educational system must first adapt to the
particular needs and attributes of the millennial
generation. And it must tap into the way tech-
savvy millennials learn, so that pedagogy can
support learning.
Recent studies of millennials suggest that they
are not passive listeners; they expect to be engaged

in learning. They socialize, study, and collaborate
in groups and expect technology to be an integral
process in learning. Business professor Roger
McHaney, author of The New Digital Shoreline,
offers some insight into ways teachers can rise to
the challenge of preparing this generation.
For starters, teachers must become a “guide on
the side” rather than the “sage on the stage.” They
will have to play the role of a master artist—imparting
new ideas and information to novices—and network
administrator, guiding students as they forge their
own learning experiences and ensuring that they
have the requisite technical and social skills.
Technology will be a basic feature of the instruc-
tion process, according to education expert Persis
Ricks. Teachers will be expected to shift seamlessly
from a didactic approach to PowerPoint or Keynote
presentations to hands-on demonstrations—all in
the same class and space. This is essential to nurture
the trial-and-error style of a generation more inter-
ested in hands-on problem-based learning than
passive listening. Many teachers will need training
in these new approaches.
Classes of the future will blend online and face-
to-face classroom instruction. The rapid increase
in massive online open courses at many universities
allows students to master material at their own
speed and in their own way.
Many skills are acquired outside formal school-
ing, especially on the job or through training. But
as jobs are redefined and lifelong careers at a single
employer disappear, retraining and lifelong learning
become a fundamental responsibility of individuals
rather than employers.
But employers too need to step up. Among work-
ing millennials in 30 countries, only a third report
that their businesses engage in education, skills,
and training. That will have to change if companies
want to hold on to their staff.
Policymakers must be at the forefront of an
agenda for policy change in education and learning.
Korea, for example, adopted a longer-term vision
for its education strategy. With 2030 as the target
date, the focus of the strategy ranges from improv-
ing collective intelligence to use of simulations and
mobile technology as research tools to improving
learning outcomes through understanding of brain
synapses and human nutrition.
Governments can help by offering incentives for
retraining, which will be increasingly important as
more people are self-employed and unable to afford
MILLENNIALS AT WORK
Hard cognitive
and social skills
have always
been at play,
but the balance
is likely to shift in favor
of the latter for 21st
century workers.
additional education. About a third of the 53 mil-
lion freelancing Americans today are millennials;
this share is expected to increase even further by
2020 according to the consulting firm PwC, also
known as PricewaterhouseCoopers.
Singapore has taken steps in this direction. In its
Singapore Skills Future initiative, employers identify
skills needed over the next five years, The Economist
writes. That information is used to map the skills
industries will need in the future; the government
then provides financial credits to citizens over 25
to acquire relevant training.
Collaboration, not competition
Most millennials recognize the benefits of automa-
tion for productivity and economic growth, accord-
ing to the Deloitte study, but 40 percent see it as a
threat. Not surprisingly, those most willing to engage
with new technology had a more positive outlook.
These attitudes mirror the polarization on tech-
nological disruption—between those who foresee
limitless new opportunities and those who predict
massive dislocation of jobs. A win requires educa-
tional systems that teach both cognitive and social
and emotional skills, businesses that actively sup-
port their workforce through retraining and upskill-
ing, individuals who are proactive about lifelong
learning, and governments that prepare a supportive
environment for these efforts.
The current technological revolution need not
become a race between humans and machines.
With proper lifelong learning and updating of
skills, humans can work with machines to unleash
the full potential of technological innovations.
NAGWA RIAD is assistant to the director in the IMF’s
Communications Department.
June 2017 | FINANCE & DEVELOPMENT 19
 PLAYING
CATCH-UP
Youth today are not building wealth the way their parents did
Lisa Dettling and Joanne W. Hsu
M
illennials began to enter the workforce
during the most severe global economic
crisis since the Great Depression, and their
present and future economic decisions
will be shaped by the historic upheaval in housing,
financial, and labor markets they faced at the onset
of adulthood. Millennials must also contend with
other emerging issues critical to their prospects of
building wealth, such as the rapidly escalating cost
of higher education and uncertain retirement income.
These developments have presented millennials
with economic circumstances very different from
those of preceding generations. We highlight three
generations of young adults and the early years of
their adulthood: baby boomers (born between 1946
and 1964), Generation X (born between 1965 and
1980), and millennials (born after 1980) (see Chart
1). Successive cohorts born between 1946 and 1990
generally experienced slower economic growth during
young adulthood than those that came before them.
These macroeconomic conditions were the result of
world developments that differed across generations:
the post–World War II recovery, the end of the Cold
War, the rise of computing and the Internet, and the
Great Recession, among many others. On average,
young adult baby boomers faced considerably more
robust economic growth than both Generation X
and millennial young adults; millennials (thus far)
have experienced the worst economic circumstances
as they entered adulthood.
To see how these broad patterns of macroeconomic
growth affected the financial situation of the typical
20 FINANCE & DEVELOPMENT | June 2017
household in these different cohorts, we turn to the
1983 to 2013 waves of the Survey of Consumer
Finances, a nationally representative survey of house-
hold wealth in the United States conducted by the
Federal Reserve Board.
To capture families’ general financial situations
over their life cycle, we focus on median net worth—a
general measure of a family’s net economic position,
defined as the difference between its assets and lia-
bilities. Though millennials are just starting to accu-
mulate wealth, their current trajectory is well below
that of both the baby boomer and Generation X
cohorts at comparable ages (see Chart 2). Between
ages 25 and 34, the typical millennial’s net worth
was about 60 percent that of the typical baby boomer
at the same age. And although baby boomers and
Gen Xers looked similar in young adulthood, Gen
Xers are currently faring worse than their baby
boomer counterparts at the same age, due in part to
the Great Recession.
Just as the economic circumstances of young
adults vary across generations, so too do the primary
challenges and opportunities for building wealth.
In this article, we will home in on three particular
issues that affect how the millennial generation
builds wealth: the growing cost of higher education,
declines in home ownership, and changes in how
families save for retirement. These three factors
represent some of the largest components of house-
hold wealth, and their context has changed dra-
matically across generations.
Borrowing for education: The cost of attending
college in the United States has far outstripped the
pace of inflation in the past few decades. But the
economic returns of a college degree remain high,
 ART: SHUTTERSTOCK / TAW4

June 2017 | FINANCE & DEVELOPMENT 21

 Dettling, corrected 4/24/17

Chart 1
Differing circumstances
Millennials are reaching adulthood in an era of lower growth than that of
previous generations, which may explain the differences in their financial habits.
(average GDP growth rate, percent) Home ownership: Owning a home is a key way
4 for families to accumulate wealth because it acts as
Baby boomers
Generation X a forced saving mechanism and allows owners to
3
Millennials realize price gains over time. Homes are most families’
largest asset, and movements in housing wealth have
been shown to be positively correlated with consump-
2 tion and childbearing.
However, young adults in the United Kingdom,
1 the United States, and Europe have experienced
declining home ownership rates. Millennial home
ownership rates are nearly 3 percentage points, or 10
0
1946 50 54 58 62 66 70 74 78 82 86 90 94 percent, lower than those of their baby boomer and
Birth year Generation X counterparts at the same age (see Chart
Dettling,
Sources: corrected 4/24/17
Organisation for Economic Co-operation and Development (OECD)
national accounts data; and World Bank national accounts data.
3). For millennials who have purchased a home,
Note: This chart shows the average growth rate of GDP per capita when the cohort however, net housing wealth (the value of the home,
was ages 18–31. Data are for OECD countries. minus mortgage debt) is about the same as that of
their baby boomer parents at the same age.

Chart 2 Living with Mom and Dad

Amassing wealth
The wealth accumulation trajectory of millennials is well below that of
other generations at comparable ages.
(median net worth, 2013 dollars)
250,000
Baby boomers
Generation X
200,000 Millennials
150,000
100,000
50,000
0 blame for falling home ownership rates and rising
18–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64
Age group
Source: Survey of Consumer Finances 1983–2013.
and millennials are the most educated generation.
To finance the rising cost of obtaining a college
education, young adults are increasingly taking out
student loans. In 1985 there were 8.9 million total
student loan borrowers, which had increased nearly
fivefold by 2014, to 42.8 million. And the average
borrower is taking on more debt than ever: aggregate
student loan volume in the United States had grown
from $64 million in 1985 to $1.1 trillion by
2014 (in 2013 dollars; Looney and Yannelis 2015).
As a result, millennials entered their working lives
with much larger debt than young adults of previous
generations. These debt burdens may continue to
influence their choices and economic circumstances
for years to come.
Furthermore, there is growing evidence that, rather
than renting, a growing number of young adults
in Europe and the United States are choosing to
live with their parents into young adulthood and
are not forming independent households. In the
United States, the number of millennials living
with their parents rose by about 12 percent during
the Great Recession.
It remains to be seen if millennials are delaying home
purchases or forgoing home ownership altogether.
New research suggests barriers to financing a home,
such as borrowing constraints, are at least partially to
coresidence rates (Martins and Villanueva 2009; Det-
tling and Hsu 2014). Whether these barriers will ease
in the future is unknown. However, a recent study in
the United Kingdom finds that groups experiencing
low home ownership rates at age 30 tend to catch up
later in life (Botazzi, Crossley, and Wakefield 2015).
Saving for retirement: The retirement landscape
has changed dramatically since baby boomers
started to enter the labor market in the mid-1960s.
In the United States, employers (particularly those
in the private sector) have increasingly switched
from generous defined-benefit pension plans, with
employer-provided guaranteed retirement income,
to defined-contribution account pensions, for
which the burden of saving for and managing
retirement wealth and income falls on employees’
shoulders during their working years and in retire-
ment. In other parts of the world, rapidly aging
populations have led many countries to undertake

22 FINANCE & DEVELOPMENT | June 2017

 Dettling, corrected 4/24/17
MILLENNIALS AT WORK

Chart 3
No place like home
US millennials are buying homes at a lower rate than previous generations at
the same age; those who do own their homes, however, tend to have as much
reforms to their public pensions, which have gen- equity as the baby boomers did.
erally reduced their overall generosity. Millennials (percent of young adults) (net housing wealth, 2013 dollars)
thus have greater responsibility for managing and 40 30,000
growing their retirement savings and greater uncer-
tainty about how much wealth and income they 35
will be able to live on in retirement. (See “Pension 20,000
Shock,” in this issue of F&D.) 30
Despite this shift from defined-benefit to
10,000
defined-contribution plans, younger generations in 25
the United States are participating in retirement plans
at higher rates than earlier generations. Participation 20 0
Baby boomers (1983) Generation X (1998) Millennials (2013)
trajectories declined after the Great Recession, however, Home ownership rate (left scale)
particularly for millennial households, and it remains Median
Dettling, corrected net housing wealth (right scale)
4/24/17
to be seen whether these declines will reverse over time
Source: Survey of Consumer Finances 1983, 1998, 2013.
(Devlin-Foltz, Henriques, and Sabelhaus 2016).

Uncertain future
Millennials, Gen Xers, and baby boomers all experi-
Chart 4
enced the economic turmoil of the Great Recession.
But because each cohort was at a different stage, the Crisis effects
recession affected each differently. Compared with US millennials had fewer assets and thus lower exposure to financial losses
the two previous generations, millennials had fewer than their elders during the global financial crisis.
(median net worth, 2013 dollars)
assets and thus lower exposure to financial losses
during the crisis (see Chart 4). And after the Great 250,000
Recession, millennials and Gen Xers began accumu- 200,000
lating wealth again, while baby boomer net worth has
Baby boomers
stalled. Although millennials have less wealth than 150,000 Generation X
their baby boomer parents at the same age, the median Millennials
100,000
millennial’s net worth increased more than 40 percent
between 2010 and 2013, and they still have much of 50,000
their working lives ahead to recover further and con-
tinue to accumulate wealth. If millennials do even- 0
2007 10 13
tually decide to buy homes or put away a nest egg for
retirement, they may have the chance to begin when Source: Survey of Consumer Finances 2007, 2010, 2013.
markets are on an upward trajectory, allowing them
to reap the gains of future economic growth.
Millennials are now the largest living generation in
the United States, having overtaken baby boomers in References:
2015. Through their sheer size, this cohort has the Botazzi, R., T. F. Crossley, and M. Wakefield. 2015. “First-Time House Buying and Catch-up:
potential to wield substantial influence on the mac- A Cohort Study.” Economica 82 (S1): 1021–047.
roeconomy as they consume, save, and borrow, both Dettling, Lisa J., and Joanne W. Hsu. 2014. “Returning to the Nest: Debt and Parental
now and far into the future as they reach their golden Co-Residence among Young Adults.” Finance and Economics Discussion Series 2014-80,
years. Only time will tell whether the recent trends Federal Reserve Board, Washington, DC.
described here are fleeting or represent a permanent Devlin-Foltz, Sebastian, Alice Henriques, and John Sabelhaus. 2016. “Is the U.S. Retire-
ment System Contributing to Rising Wealth Inequality?” Journal of the Social Sciences 2
shift in millennials’ financial habits and wealth.
(6): 59–85.
Looney, Adam, and Constantine Yannelis. 2015. “A Crisis in Student Loans? How Changes
LISA DETTLING and JOANNE W. HSU are senior economists in the Characteristics of Borrowers and in the Institutions They Attended Contributed to
at the Board of Governors of the US Federal Reserve System. Rising Loan Defaults.” Brookings Papers on Economic Activity (Fall): 1–89.
The analysis and conclusions set forth are those of the authors Martins, Nuno C., and Ernesto Villanueva. 2009. “Does Limited Access to Mortgage Debt
and do not indicate concurrence by other members of the Explain Why Young Adults Live with Their Parents?” Journal of the European Economic
research staff or the Board of Governors. Association 7 (5): 974–1010.

June 2017 | FINANCE & DEVELOPMENT 23

 In Their
Own Words
Millennials reflect on the key challenges facing their generation
Niccole Braynen-Kimani and Maria Jovanović
A
re today’s young people hopeful or dispir-
ited? Are they finding good jobs and
saving for the future, or living paycheck
to paycheck? Do they believe education is the key
to economic success, or does entrepreneurship—
and operating outside the established system—
have more appeal for them? F&D asked youth
leaders from around the world to weigh in on the
challenges of their generation and whether they
see themselves as better or worse off than their
parents’ generation.
Our informal survey took us to different cor-
ners of the globe—to China, Egypt, France,
Nigeria, and Peru. Five millennials gave us their
take on what is important to them individually
and collectively as a segment of the global
PHOTO: ISTOCK / BJDLZX / JAMIELAWTON
24 FINANCE & DEVELOPMENT | June 2017
population that is facing unique challenges in a
shifting global environment.
All the young people saw their generation as
being a central part of a global village, connected
through technology and easy access to information,
and an era of global citizenship. “This generation
constructs bridges, not walls,” says Mariel Renteria
of Peru. They also see their cohort as having a more
entrepreneurial spirit, whether by economic neces-
sity or through force of will.
So what is on the minds of young people around
the world? Should they take a menial job just
because there’s nothing better? And just what would
they tell their policymakers if they had the chance?
Five influential youth reflect here on what motivates
or intrigues them.
PHOTO: ESTEFANIE RENTERĺA
PERU: Mariel Renteria
Cofounder and board member of Kunan,
a nonprofit organization that supports
young social entrepreneurs
Mariel Renteria is a strong believer in the power
of education to encourage her country’s younger
generation to develop a positive, entrepreneurial,
and global vision. A deep interest in education
is a key driver for young Peruvians, Mariel says.
She points to a poll by IPAE AcciÓn Empresarial
in CADE Universitario, the foremost university
student summit in Peru, that highlighted not
only the importance of access to quality educa-
tion but also a national commitment to the
improvement of the education system. She
applauds the Peruvian Education Ministry’s
success in recruiting high-quality, committed,
and innovative young public officials. “One fact
that differentiates this generation is that today,
education is perceived as a fundamental means
of furthering individual development and that
of society as a whole.”
Better and more sustained education can also
connect disadvantaged young people in rural
areas with opportunities in the cities. “Social
inequality is a national issue to tackle as well
as a challenge that allows us to be united. The
most important contribution from policymakers
should be a quantum leap in the national edu-
cation system, improvements to digital and
infrastructural connectivity, and the promotion
of additional platforms that connect us with
the world.”
MILLENNIALS AT WORK
PHOTO: ETUC CES
FRANCE: Thiébaut Weber
Confederal Secretary, European Trade
Union Confederation
“Nature abhors a vacuum,” says Thiébaut Weber,
invoking Aristotle. This young leader sees innovation
as a way forward for youth in his region. “Many
innovative projects are underway on the ground in
areas like short circuitry, coworking spaces, defense
of digital-platform workers, solidarity with migrants,
and cooperatives. Young people are taking part in
these initiatives. Their will to act is welcomed and
needed in the labor movement. Trade unions are
tremendous ‘fab labs’ to realize new ideas.”
Thiébaut believes a good job is one in which the
worker feels empowered—a founding belief of the
labor movement, he notes. “In a good job, workers
are also secure and respected, regardless of age and
status. Whether on the payroll of a company or
self-employed, in the end you are a worker.”
He adds that being secure also means being pro-
tected against unfair dismissal or from being abusively
“deactivated” from an online platform, and having a
job that provides a fair wage to allow workers to
contribute and benefit from social protection. 
He believes too in the need for policymakers to
consider young workers as a long-term investment
in the future. They should focus not only on growth
and job creation but also on the quality of jobs. “A
precarious and low-paying job is not ‘better than
nothing.’ Young people are hard workers. But employ-
ers and policymakers should not consider this as a
sign of docility. They should bear in mind that pre-
cariousness contributes to the rise of extremism.”
June 2017 | FINANCE & DEVELOPMENT 25
MILLENNIALS AT WORK
PHOTO: KARIM OMRAN
EGYPT: Jawad Nabulsi
Founder of Nebny Foundation for
Development, an after-school program for
primary school students
Through the Nebny Foundation for Development,
an organization he founded, Jawad Nabulsi has
had the opportunity to interact with many young
people living in the impoverished Manshiet Nasser
area of Cairo. Despite having been dealt a difficult
hand, he observes, these youths show a remarkable
desire to “create, curate, explore, and learn through
trial and error.” When the formal education and
employment systems fail to provide them the tools
and opportunities they need, the younger gener-
ation secures its own future.
To save themselves from poverty, these young
people come up with creative, high-impact solu-
tions to the problems they and their communities
face. They are referred to as “invisible entrepre-
neurs”—operating with low budgets and without
the fancy degrees or Ivy League credentials enjoyed
by the elite class of entrepreneurs filling the seats
at international forums and conferences. But
Egypt’s invisible entrepreneurs have something
better than fame to drive them. “They only seek
survival, and that is probably the strongest motive
for any social enterprise to take shape,” says Jawad.
“They do not fit the typical entrepreneurial profile
drawn by society.”
26 FINANCE & DEVELOPMENT | June 2017
“Youth can
now learn
directly
from world-
renowned
professors
online.”
Because of their familiarity with the problems
facing residents of Manshiet Nasser, these entre-
preneurs are in the best position to tackle them.
They know the ropes and have the passion to be
agents of change.
And just a little goes a long way—the success
of these entrepreneurs’ projects and ideas leads
to a positive feedback loop in the community. As
Jawad notes, “the roads between Manshiet Nasser
and elite schools have become much shorter.”
Over the years, several local nongovernmental
organizations have begun offering Egyptian youth
a chance to supplement their education. “Youth
who were once unaware of the world outside of
their neighborhood can now learn directly from
world-renowned professors online,” says Jawad.
The opportunities for lifelong learning offered
by these organizations were unimaginable for
previous generations.
The changes taking place in this poor Cairo
neighborhood are largely a result of the motiva-
tion and determination of the young entrepre-
neurs who have actively participated in improving
their own lives—and brought their whole com-
munity along for the ride. In their triumphs,
Jawad finds compelling evidence for identifying
and investing in other youth whose passion and
innovation “contributes in immense ways to the
development of their surrounding environments
and societies.”
PHOTO: THE UNIVERSITY OF NOTRE DAME INSTITUTE FOR GLOBAL DEVELOPMENT (NDIGD)
NIGERIA: Charles Akhimien
Cofounder of MOBicure, a mobile health
company using technology to address
health care needs in developing economies
Charles Akhimien tells the story of Chris, a young
Nigerian man who is disillusioned with the lack of
social safety nets in his country and across Africa.
Chris earned a graduate degree in petroleum engi-
neering and had dreams of becoming an engineer
during his country’s crude oil boom by joining one
of the oil companies driving economic growth in
Nigeria. He imagined earning a six-figure salary—
enough to take care of himself, his aging parents, and
his siblings—but after four years of searching, he is
not even close to achieving that goal. He has had to
resort to low-paying, menial jobs to survive.
And he is not alone: Africa’s unemployment rate
is among the highest of any region in the world.
Charles sees his friend’s story as emblematic of
the failures of government. Political stability, an
end to corruption, and a better educational system
are hugely important to equipping young people
with the tools to meet the demands of the modern
job market, he says.
Yet Charles is hopeful. Alongside the story of
pervasive youth unemployment is the story of the
continent’s fast and steady strides in innovation and
entrepreneurship that is already evident in cities like
Nairobi, Lagos, and Johannesburg, he says. In these
places, innovation hubs are springing up, largely run
by young people who are changing the narrative.
“Young people represent the hope of Africa. All over
Africa, youth are increasingly realizing that, in order
to thrive, they have to create the future they want.”
PHOTO: TM MEDIA
CHINA: Kathy Gong
Cofounder and chief executive officer
of WafaGames
Kathy Gong believes in the power of individuals
to map their own destiny through determination,
grit, and creativity. She sees members of her gen-
eration as possessing these characteristics.
Her determination led her to fight against hukou,
a national system of household registration that
determines where citizens officially reside, and by
extension means unequal access to health care,
property ownership, and basic education. She tells
the story of how her parents decided to move from
their rural community into a city to start a business.
After being denied entry into an elementary school
because of the hukou rules, she enrolled in a chess
school and eventually became the youngest national
chess champion at the age of 10.
Kathy sees other young people in her country
as similarly self-driven and motivated to have a
better life—willing to lead rather than follow.
But she acknowledges that her generation also
feels more stressed because of changing workplace
dynamics and worries about having enough
money to afford children, a place to live, and
eventual retirement.
“Our future depends on the young people
because they are the core of creativity, the force
behind breakthrough innovation, advocates for a
fairer society, and drivers of economic growth and
societal improvement,” she says.
NICCOLE BRAYNEN-KIMANI and MARIA JOVANOVIĆ are
on the staff of Finance & Development.
June 2017 | FINANCE & DEVELOPMENT 27
 PEOPLE IN ECONOMICS

Prophet of
PESSIMISM
Chris Wellisz profiles Robert J. Gordon, who predicts a slowdown in
innovation will take a toll on economic progress

28 FINANCE & DEVELOPMENT | June 2017

 PEOPLE IN ECONOMICS
R
obert J. Gordon has a gloomy message
for US millennials: unlike previous
generations going back to the late 19th
century, you won’t see your standard
of living double that of your parents.
“I’m here as the prophet of pessimism,” says
Gordon, 76, seated in his book-lined office at North-
western University in Evanston, Illinois. Gordon is
the author of a best-selling book, The Rise and Fall of
American Growth. Its controversial thesis is that the
United States is likely to languish in the economic
doldrums, largely because the inventions of the future
are unlikely to be as revolutionary as those of the
“special century” from 1870 to 1970.
Electricity, the internal combustion engine, and
indoor plumbing dramatically improved the stan-
dard of living in a way that’s unlikely to be repeated,
he argues. Most advances since then have been
incremental rather than transformational.
“We moved from the speed of the horse and the
sail to the Boeing 707, and we have not gone any
faster since,’’ Gordon says in an interview on the
campus just north of Chicago by the shore of Lake
Michigan. “The telegraph in 1844 created instan-
taneous communication, and we are now elaborating
on instantaneous communication.”
Beyond the ivory tower
The publication of Rise and Fall last year propelled
Gordon into the ranks of economists whose renown
extends far beyond the ivory tower. Gordon estimates
that he’s been interviewed at least 80 times by report-
ers and received more than 200 emails from readers.
He has given the obligatory TED Talk and appeared
on television. Among the many reviewers of his book
was Microsoft founder Bill Gates.
Gordon’s pessimistic message resonates at a time
of economic malaise, as scholars struggle to explain
the phenomenon for which Harvard University’s
Lawrence Summers has resurrected the term “secular
stagnation.” In the period from 1970 to 2014, labor
productivity (output per hour worked) grew at an
average annual pace of 1.62 percent, compared
with 2.82 percent in the previous half-century.
PHOTO: JUSTIN RUNQUIST
At 762 pages, The Rise and Fall of American Growth
offers a detailed and colorful account of the trans-
formation of every aspect of daily life in America,
from shopping and entertainment to medicine and
banking. Even those who dispute his conclusions
admire the breadth and depth of his scholarship.
“Bob is absolutely unimpeachable about the past,’’
says Andrew McAfee, coauthor, with Erik Brynjolfs-
son, of The Second Machine Age, which argues that
computers and other digital technologies will do for
mental power what the steam engine did for muscle
power. “He makes the argument very well that this
past century was an absolutely extraordinary one.
Where Bob and I part company is about the inno-
vations that we see unfolding around us now, and
how big a deal they’re going to be.”
Lower impact
Gordon doesn’t dispute the significance of advances
such as the personal computer and the Internet, which
generated a burst of growth from 1996 until 2004.
But most of those haven’t measured up to what he
calls the “great inventions’’ of the past, which remade
the economy in a way that smartphones and tablet
computers have not. In public appearances, Gordon
displays two images side by side: a smartphone and
a toilet. “Which would you rather give up?” he asks.
He relishes his role as the scourge of the techno-
optimists. One of his intellectual sparring partners
is Joel Mokyr, a fellow Northwestern economist
who jokingly refers to Gordon as “my esteemed
and much misguided colleague.”
“We actually agree on most things,’’ Mokyr said
in a recent appearance at the IMF’s headquarters
in Washington, DC, where he discussed his recently
published book, A Culture of Growth: The Origins
of the Modern Economy.
In it, Mokyr argues that values and beliefs that
arose in Western Europe in the years 1500–1700
produced a spirit of scientific inquiry that laid the
groundwork for the great inventions that came
later. A precondition for the steam engine was the
discovery that it’s possible to produce a vacuum.
“If you look at what’s happening to science and
scientific progress in the past decade, I think it’s
been as exciting as ever,” Mokyr says.
Gordon sticks to his guns, saying he sees little
evidence that the latest technology has had a sig-
nificant impact.
“Lots of things are being proposed—replaceable
body parts, enormous revolutions in medicine—but
they are going to happen very slowly,” Gordon says.
June 2017 | FINANCE & DEVELOPMENT 29
 PEOPLE IN ECONOMICS
Rise and Fall is the culmination of decades of
research into the sources of economic growth. In
his PhD thesis at the Massachusetts Institute of
Technology (MIT), Gordon developed a new
method of estimating the costs of construction.
That eventually led to his groundbreaking 1990
book, The Measurement of Durable Goods Prices,
which demonstrated that standard measures of
capital failed to account for improvements in qual-
ity. “It was a very, very important contribution and
changed the way people think about growth,” said
Lawrence Christiano, chairman of Northwestern’s
economics department.
Inflation has been another major area of research
for Gordon. The “stagflation’’ of the 1970s—a
simultaneous increase in both inflation and unem-
ployment—challenged the conventional view,
embodied in a relationship known as the Phillips
“
curve, that higher inflation was generally accom-
panied by lower unemployment.
Gordon pioneered the development of a modified
version of the Phillips curve that accounted for the
impact of supply shocks such as the oil crisis of
Gordon relishes his role as the scourge
of the techno-optimists.
1973, when the price of a barrel of crude shot up
to $12 from $3.
That research formed the basis for what Gordon
calls the “triangle’’ model of inflation, which
accounts for changes in supply and demand as well
as inertia, or the time it takes for those changes to
affect the overall level of prices.
The model proved relevant in explaining another
surprising phenomenon: the “Goldilocks” economy
of the 1990s, when unemployment remained low at
a time of tame inflation. Gordon now plans to update
his model to explain why prices continued to rise
during the global financial crisis of 2008–09, despite
the seismic shocks to output and employment.
During the Goldilocks years Gordon served on a
five-member panel of economists formed by the Senate
Finance Committee in 1995 to study the accuracy of
the consumer price index. The Boskin Commission,
named for its chairman, Stanford University economist
Michael Boskin, concluded that the index overstated
inflation by 1.1 percentage points.
30 FINANCE & DEVELOPMENT | June 2017
The US Bureau of Labor Statistics adopted some
of its recommendations for changes to the way it
calculated the price index.
Gordon’s work on the “triangle” model of inflation
demonstrated the importance of “core” inflation,
which strips out the impact of volatile food and energy
prices. That allows Federal Reserve policymakers to
focus on the longer-term inflation trend while looking
past short-term fluctuations caused by such develop-
ments as a sudden spike in gasoline prices.
Nobel Prize–winning economist Paul Krugman
calls that a “hugely important” contribution.
“Twice recently—in 2008 and 2011—we’ve seen
surges in headline inflation, with many people warn-
ing that central banks were behind the curve and
demanding that rates be hiked and/or quantitative
easing be reversed,” Krugman writes in an email.
“But these were all about commodity prices—
which meant that core inflation was quiescent. The
Fed, which focused on core, therefore concluded
rightly that it should stay the course.”
Rise and Fall was inspired by a trip to a bed-and-
breakfast in Michigan, where Gordon chanced upon
a book of photographs by Otto Bettmann titled The
Good Old Days: They Were Terrible! The book, by
the founder of the Bettmann photographic archive,
depicts the miseries of slum life in the late 19th
century. “So it was natural to see how enormously
things have improved since then,’’ Gordon recalled.
He spent four years on the book, aided by teams
of research assistants. His office and home were
crammed with piles of books bristling with Post-it
notes. The result was a startling level of detail
describing the drudgery of daily life in the pre–Civil
War United States and the dramatic improvements
that came later with inventions such as indoor
plumbing, electric lights, and kitchen appliances.
One of Gordon’s research assistants was Andrew
Sabene, who spent long hours in Northwestern’s
transportation library, poring over 19th century
railroad timetables.
Sabene described Gordon as a demanding boss who
had his researchers keep close track of their time. But
the two eventually bonded over their mutual interest
 PEOPLE IN ECONOMICS
in music, even meeting over coffee with Gordon’s
wife, Julie, a portrait artist and professor of English
and film at Northwestern, to talk about their favorite
classical composers and Broadway musicals.
Gordon’s neat, if jam-packed, office is a testament
to the variety of his interests—which include pho-
tography, aviation, and history. While his shelves are
lined with books on economics—including several
editions of his own popular textbook, Macroeconomics—
the walls are covered with photos of his travels to
countries such as India and Thailand.
In an intermediate macroeconomics class packed
with more than 200 students, Gordon delivers a
brisk and well-organized lecture with the help of
an overhead projector, which allows him to sketch
out graphs as he speaks.
Gordon says he enjoys teaching, particularly his
freshman seminar titled “Did Economics Win Two
World Wars?” “That title is a subterfuge because it
is about the wars themselves, not just about econom-
ics,” he says.
That subterfuge reflects his early interest in history.
As an undergraduate at Harvard University, he ini-
tially planned to major in the subject but changed
his mind after getting a B in one course. “History
was too subjective; there were too many different
possible answers,’’ he says. “Maybe I just was too
nervous about a subject that I could get a B in.”
All in the family
So he followed in the footsteps of his parents,
Robert Aaron and Margaret Gordon, both prom-
inent economists at the University of California,
Berkeley. His younger brother, David Gordon, also
an economist, taught at the New School for Social
Research in New York. He died in 1996, at 51.
After graduating from Harvard in 1962, Gordon
went on to earn a doctorate at MIT, where his thesis
adviser was Robert Solow, the Nobel Prize winner
who in 1987 famously observed that the computer
age could be seen everywhere except in the pro-
ductivity statistics. (It was almost another decade
before the impact of the new technologies on pro-
ductivity became apparent.)
The slowdown in innovation isn’t the only thing
that’s holding back growth, Gordon argues. The
US economy also faces “headwinds” such as rising
inequality, a plateau in educational attainment, an
aging society, and the burden of government debt.
What does Gordon’s pessimistic prognosis portend
for US President Donald Trump’s plan to boost growth
PHOTO: JUSTIN RUNQUIST
to between 3 percent and 4 percent a year with the Economist Robert
Gordon predicts
help of cuts to personal and corporate income taxes US productivity
and a $1 trillion infrastructure program? growth will slow
Trump’s stimulus could boost productivity and dramatically.
growth in the short term as existing workers labor
more intensively and new ones are drawn into the
labor force, Gordon says. But the improvement is
unlikely to last more than a year or two.
He ticks off a list of obstacles. Trump’s policies
would probably drive up the dollar and interest rates,
which would tend to restrain growth. Cuts to non-
defense spending would also be counterproductive.
And tax cuts aimed primarily at the affluent might
do little to boost demand, because the rich are less
likely than the poor to spend the extra income.
Instead, policymakers should focus on raising
productivity in the long term, largely through
improvements to education and training, Gordon
says. He suggests eliminating disparities between
rich and poor public school districts, investing in
early childhood education, and creating a Ger-
man-style system of vocational training.
Gordon’s former research assistant, Sabene, says
he’s heartened by the prospect that even if the
United States has fully realized the benefits of the
great inventions of the past, that is not true for
much of the world.
“Think of countries like India where running
water and urbanization and all of that is still in
process,” he says. “I take some comfort in knowing
that there’s a lot of runway left to go.”
CHRIS WELLISZ is on the staff of Finance & Development.
June 2017 | FINANCE & DEVELOPMENT 31
 CASH IS DEAD,
LONG LIVE CASH
Virtual payments are fast displacing cash,
but not completely and not everywhere
Alan Wheatley
F
ewer Nordic banks are using cash in their
branches. India recently scrapped 86
percent of its banknotes. Korea plans to
stop minting coins by 2020. Online
payments are booming. The march toward a
cashless society, it seems, is unstoppable.
Young people especially, as well as the better off
and better educated, are increasingly at ease paying
by card or mobile phone. In the Netherlands, for
instance, the number of card transactions surpassed
cash (NFPS 2016) for the first time in 2015.
But wait. In other advanced economies, including
Austria, Germany, Japan, Singapore, and
32 FINANCE & DEVELOPMENT | June 2017
Switzerland, cash is still king and shows no sign of
abdicating. Globally, perhaps 85 percent of all
payments are still made in cash.
“The cashless society, as appealing as it may
sound, is probably just as elusive as the much
vaunted paperless office,” according to Yves Mersch,
a member of the European Central Bank’s (ECB’s)
executive board.
There is no inherent reason cash should survive if
more efficient means of payment evolve. Cowrie shells
were also a useful medium of exchange once. Banknotes
did not come into use until the printing press had
become sufficiently widespread and dependable.
ART: ISTOCK / ALEX_DOUBOVITSKY
“Today we can say the same thing about modern
communication technology as about the printing
presses in the 17th century. Access to the Internet
is widespread, and computers, smartphones, and
tablets are household items. Thus, the conditions
are ripe for launching more electronic payment
forms,” Cecilia Skingsley, deputy governor of Swe-
den’s Riksbank, has said.
Sweden is blazing the cashless trail. Cash is now
used for only 15 percent of transactions at the point
of sale. Because cash distribution costs in the
sparsely populated country are high, fewer than
half of Swedish banks still handle cash. Uniquely,
cash in circulation fell by nearly 15 percent between
2007 and 2015. Even homeless sellers of Stock-
holm's street magazine accept mobile payments.
Network effects
Successful digitization of retail payments depends
on economies of scale and network effects. In the
case of technology-friendly Sweden, consumers
and merchants alike have been happy to desert
cash. The trend has been reinforced by a long tra-
dition of cooperation among Sweden’s biggest
banks, which jointly run the country’s payments
infrastructure. So a new service enabling real-time
payments was immediately able to reach most of
the population.
“But if you look at some bigger countries, say
Germany or the U.S., you have so many more
important players that it’s simply more difficult to
create this atmosphere of cooperation,” Björn Seg-
endorf, of the Riksbank’s Financial Stability Depart-
ment, tells F&D.
The more people use a particular platform, the
more attractive it becomes—like Facebook. The
M-Pesa mobile payment service took off in Kenya
because there was one dominant mobile operator,
Safaricom, in a country where few people had access
to a bank: a market was crying out to be opened up.
“M-Pesa is a good case of network externalities
promoting non-cash use,” Kim Huynh at the Bank
of Canada tells F&D. “In Canada, contactless credit
cards are a similar case.” Their use tripled between
2009 and 2013 (Fung, Huynh, and Stuber 2015).
Contactless cards and devices contain an antenna that,
when held very near or against a special-purpose
terminal, transmits two-way purchase information.
China has largely bypassed cards and is jumping
directly from cash to mobile. The number of mobile
payment users leapt 64.5 percent in 2015, and
nearly 60 percent of the country’s 710 million
Internet users were paying with mobile devices at
the end of that year.
India, too, criticized for the clumsy execution of
its plan to withdraw 100 and 500 rupee bills from
circulation in a crackdown on illicit income, is
laying the foundations for a digital payment net-
work by cataloguing biometric data that will allow
citizens to open subsidized bank accounts.
Less crime, more tax revenue
India is not alone in trying to increase tax collection
and lower crime and corruption by deterring the
use of cash. A number of European countries have
imposed ceilings on cash transactions, and the ECB
plans to stop printing the €500 note, its highest
denomination, in 2018.
Peter Sands, the former chief executive of Stan-
dard Chartered Bank, is critical of the ECB for not
acting more rapidly to stop issuance of the €500
note and to encourage withdrawal of the outstand-
ing stock. But he adds: “What is good is that there
is now much broader acceptance that cash—and
particularly high-denomination notes—plays a big
role in facilitating illegal activities.”
Sands advocates a pact among the Group of 20
advanced and emerging market economies (G20)
for rapid withdrawal of all hard-currency notes
“There is now much
broader acceptance that
cash plays a big role in
facilitating illegal activities.”
with a value of more than, say, $50 because they
dominate illicit financial flows in poorer countries.
More than 60 percent of all $100 bills, the highest
US denomination, circulate abroad. “Getting rid
of such notes is one of the best things that could
be done by the advanced economies to reduce
corruption and increase tax collection in the devel-
oping world,” Sands tells F&D.
Former US Treasury Secretary Lawrence Sum-
mers and ex–IMF chief economist Kenneth Rogoff
also propose phasing out big bills. They have a
battle on their hands. For one thing, Switzerland
has no plan to do away with its 1,000 franc note,
one of the biggest bills in the world (see “Mountains
of Cash” in the December 2016 F&D).
Apart from disrupting the underground economy,
replacing cash would save money. Processing all
but the smallest card payments is cheaper than
June 2017 | FINANCE & DEVELOPMENT 33
 handling cash. Korea wants to abolish coins because
minting costs exceed their face value. In Singapore,
where cash accounts for 60 percent of consumer
payments and checks for 30 percent of business
transactions, going cashless would save more than
0.5 percent of GDP, according to a study for the
Monetary Authority of Singapore.
True, central banks would forgo seignorage, the
profit made by issuing currency, but the sums involved
are generally small. In any case, as Sands says in a
paper for the Harvard Kennedy School, “Providing
criminals with high denomination notes because doing
so makes money seems indefensible.”
Doing away with big bills could also be an aid to
monetary policy, Rogoff argues. That is because central
banks would have more leeway at times of deflation
to impose negative interest rates if there were no longer
a threat of a stampede to turn bank deposits into cash.
The falling use of cash is transforming the task
of ensuring the security and efficiency of the pay-
ment system. The authorities have to worry less
Several central banks
are exploring the merits
of issuing their own
electronic money.
about counterfeit notes and bank heists and more
about cybertheft.
One of their toughest challenges is to maximize
access to digital finance. In a world where 2 billion
people are unbanked, holding back growth and
entrenching poverty, financial inclusion is climbing
the policy agenda.
In advanced economies, too, people without the
Internet are finding it harder to access not only
electronic payment networks but services of all
kinds. “It’s more a question of digital exclusion,”
says the Riksbank’s Segendorf. “They are shut out
of large parts of society.”
The case for cash
The trend toward digitization may be irreversible,
but Sands, for one, is not arguing for rapid removal
of all cash, particularly in developing economies.
“Low-value cash instruments are enormously flexible
and robust payment instruments—you don’t need
34 FINANCE & DEVELOPMENT | June 2017
electricity, Wi-Fi, or cellular signals to make them
work. Nor do you need to be literate,” he says.
Cash is also entrenched in advanced economies,
accounting for more than half of all transactions by
volume in six of seven countries covered in a coor-
dinated central bank survey. In Austria and Germany,
the share was 82 percent (Bagnall and others). In
every country surveyed cash use decreases with edu-
cation and income. Why? Among other things, a
glance in the wallet makes it easier for households
on tight budgets to monitor their finances.
Plenty of reasons have been put forward to explain
why Germany, for instance, remains addicted to
cash. One is an aversion to debt (and hence to credit
cards); another is the folk memory of hyperinflation.
Researchers are dubious about the latter theory
(Bagnall and others), but, importantly, they say
consumers everywhere are not completely rational
in their choice of payment methods.
“Decision-making is more of an emotional
process than a cognitive process,” according to
Frank van der Horst and Ester Matthijsen of the
Dutch National Bank. “On balance, paying by
cash triggers more positive emotions than paying
by debit card,” they reported (Deutsche Bundes-
bank 2014). Think of it this way: isn’t it more
satisfying to give a child a crisp new banknote as
a present than to write her a check?
Whether the desire to cling to cash is best
described as subliminal or atavistic, Dario Neguer-
uela of the Bank of Spain said it cannot be ignored:
“Cash has certain special characteristics that link
it to feelings and to deep and primitive human
sentiments (Deutsche Bundesbank 2014).”
For some, cash is a tangible symbol of wealth
and standing; for others, it is a defense against
attempts by an all-encroaching “Big Brother” sur-
veillance state to rob people of their anonymity by
forcing them to leave an electronic payment trail.
Michael Tomlinson, a 68-year-old London
lawyer, happily uses his smartphone to make mobile
payments. But he also withdraws more than £1,000
a month in cash for tipping in restaurants and for
use in an emergency in case his credit cards are
hacked—as has already happened.
Tomlinson cannot imagine ever doing without
cash. “The more options I have as a consumer, the
more I like it,” he says. “I don’t see why I should
fall into line with what the banks want.”
Or, to quote Dostoyevsky, “Money is
coined liberty.”
 What does the future hold?
Innovation will provide ever more opportunities
to do without cash. Ian Pearson, a futurologist who
runs the UK consultancy Futurizon, expects pieces
of security jewelry, such as electronic signet rings,
to enter the market for payment authentication.
Transferring money through fingerprint recognition,
or even a handshake, will also become possible,
Pearson predicted in a report for the UK Payments
Council. But he sees a good chance that technology,
rather than killing off cash, will prolong its life
because people will put a premium on privacy. “We’ll
probably still have some form of everyday cash for
little things even in 2040,” Pearson tells F&D.
New forms of payment
A central focus of central bankers grappling with
new forms of payment is the rapid development
of blockchain technology, which underpins the
digital currency bitcoin (see “The Internet of Trust”
in the June 2016 F&D).
In December the People’s Bank of China report-
edly completed a successful trial run of a system
for the transaction and settlement of bank accep-
tance bills using a blockchain-backed digital cur-
rency it had developed.
Several other central banks, including the Riksbank,
are also exploring the merits of issuing their own
electronic money—and the associated policy impli-
cations. For example, unpredictable public demand
for e-krona could theoretically make it hard to carry
out fine-tuning operations in the money market and
to steer the money supply, the bank’s deputy governor,
has warned (Skingsley 2016).
Blockchain has the potential not only to spawn
competing currencies but also to permit the replace-
ment of existing centralized payment systems by
peer-to-peer networks. A continuously updated
ledger would keep track of all transactions and
would be distributed among all participants. By
obviating the need to be routed via the central
bank’s payment system, settlement would poten-
tially be faster and cheaper.
Jon Nicolaisen, deputy governor of the Norwe-
gian central bank, said in a 2016 speech that society
might benefit greatly from a decentralized financial
infrastructure. But the prospect raised fundamental
questions about how banks’ funding and lending
would be affected.
Carolyn Wilkins, senior deputy governor of the
Bank of Canada, added that distributed ledger
technology could take regulators into uncharted
territory over issues of law and governance. New
fintech applications could also have implications
for financial stability if some payment providers
become “too big to fail,” Wilkins said.
Central bankers have no precedent to help them
answer all these questions, but they do have time
on their side: They expect banknotes to be used
for the foreseeable future. Rogoff, in his book The
Curse of Cash, advocates moving to a “less cash”
society, not a cashless one. For one thing, whoever
operates the new payment technologies will have
to earn people’s trust—trust that, in the case of
banks, has been badly eroded by the financial crisis.
Segendorf, the Riksbank official, says he personally
can picture a day when Sweden dispenses entirely
with cash. But the central bank researchers who
surveyed payment methods in advanced economies
probably better reflect today’s consensus. “Reports
of the death of cash have been exaggerated,” they
conclude (Deutsche Bundesbank 2014).
ALAN WHEATLEY is an economics writer and editor, formerly
with Reuters, and editor and coauthor of The Power of Currencies.
References:
Bagnall, John, and others. 2016. “Consumer Cash Usage: A Cross-Country Comparison
with Payment Diary Survey Data.” International Journal of Central Banking (December).
Deutsche Bundesbank. 2014. “The Usage, Costs, and Benefits of Cash—Revisited.”
International Cash Conference Report.
Fung, Ben, Kim P. Huynh, and Gerald Stuber. 2015. “The Use of Cash in Canada.” Bank of
Canada Review (Spring).
National Forum on the Payment System (NFPS). 2016. 2015 Annual Report. Amsterdam:
De Nederlandsche Bank.
Skingsley, Cecilia. 2016. “Should the Riksbank Issue ekrona?” Speech at Fintech
Stockholm, November 16.
June 2017 | FINANCE & DEVELOPMENT 35
CAPITAL
SLOWDOWN Investment growth in emerging market and developing
economies has been sluggish since 2010
M. Ayhan Kose, Franziska Ohnsorge, and Lei Sandy Ye
I
nvestment growth in emerging market and
developing economies has slowed sharply since
the global financial crisis, declining from 10
percent a year in 2010 to less than 3.5 percent
in 2016. While there have been signs of revival
recently, over the past three years, investment
growth, both public and private, has been not only
well below its double-digit precrisis average rate
but also below its long-term average.
Moreover, the investment weakness has been
broad-based. In 2016, investment growth was below
its long-term average in more than 60 percent of
emerging market and developing economies, the
largest number of countries to experience such
sluggishness over the past quarter-century except
during the 2009 global recession (see Chart 1). The
weakness has persisted despite large unmet invest-
ment needs and is visible in both private and public
components of investment.
The slowdown has been most pronounced among
the large, so-called BRICS (Brazil, Russia, India,
China, South Africa) economies and in commodity
exporters. Between 2010 and 2016, investment
growth dropped from about 13 percent to about 4
percent in the BRICS and from roughly 7 percent to
0.1 percent in non-BRICS commodity-exporting
emerging market and developing economies. China
accounted for about one-third of the total investment
36 FINANCE & DEVELOPMENT | June 2017
growth slowdown in these economies during this
period and Brazil and Russia for another third. The
sustained investment growth slowdown in emerging
market and developing economies contrasts with its
partial recovery in advanced economies since the
global financial crisis. Investment growth in advanced
economies averaged 2.1 percent during 2010–15. By
2014, it had returned to its long-term average growth
rate, not far below where it was before the crisis.
Why the slowdown?
The investment slowdown reflects a number of
factors that offset exceptionally benign financing
conditions—including record-low borrowing costs,
ample financial market liquidity, and in some coun-
tries a surge in domestic private credit to the non-
financial private sector. However, many headwinds
offset the benefits of these historically low financing
costs until late 2016, including disappointing eco-
nomic activity and weak growth prospects and a
severe decline in export prices vis-à-vis import prices
(that is, a worsening in terms of trade) for commodity
exporters, slowing and volatile capital flows, rapid
accumulation of private debt, and bouts of policy
PHOTO: ISTOCK / FOTOSLAZ
uncertainty in troubled major economies.
We estimated the relative importance of these
domestic and external factors in explaining
investment growth.
 Adverse factors over the medium term: In
contrast to advanced economies, slowing output
growth accounted for only a small share of the
slowdown in the average emerging market or
developing economy.
Terms-of-trade shocks were more important for
oil exporters; for commodity importers, slowing
inflows of foreign direct investment (in which
foreigners take an ownership role), as well as private
debt burdens and political risk for many emerging
market and developing economies, played a large
role. For oil exporters, on average, the terms-of-
trade shock caused by the oil price decline that
began in 2014 accounted for about half of the
investment growth slowdown. For the average
commodity importer, slowing foreign direct invest-
ment inflows accounted for more than half of the
slowdown in investment growth.
Private sector debt-to-GDP ratios have unduly
affected investment: the benefits of increased avail-
ability of financial services (financial deepening) for
investment are increasingly outweighed by harmful
effects of excess debt. The postcrisis reduction in
debt in several commodity-importing emerging
market and developing economies has reduced some
of these obstacles to investment growth. In contrast,
in several non–energy commodity exporters, high
private debt has stymied investment. Rising political
risk may account for about a tenth of the slowdown
in investment growth in emerging market and devel-
oping economies since 2011.
Elevated uncertainty: Two forms of global and
country-specific uncertainty are a major drag on
investment: financial market uncertainty and
macroeconomic policy uncertainty. Domestic policy
uncertainty holds back investment growth at home;
global financial market uncertainty and policy uncer-
tainty, such as in the European Union (especially
among emerging market and developing economies
in Europe), have weighed on investment more broadly.
Global financial market uncertainty, as measured
by the VIX index (which tracks volatility in the US
Standard & Poor’s index of 500 stocks), is a key
variable for explaining the path of investment in
Any setbacks to growth also jeopardize
global goals for poverty reduction.
emerging market and developing economies, espe-
cially when there has been a sustained increase in
the index. For example, a 10 percent increase in
the VIX would considerably reduce investment
growth (by about 0.6 percentage point within one
year) in these economies.
Bouts of policy uncertainty in the European Union,
especially during the euro area crisis of 2010–12,
spilled over on close economic partners. For example,
policy uncertainty increased significantly during the
four months ending September 2011 (at the height
of the euro area crisis). This type of rapid increase
in uncertainty has likely reduced investment, cer-
tainly in emerging market and developing economies
in Europe and central Asia. In addition to these
cross-border-uncertainty spillovers, domestic uncer-
tainty added to investment weakness in major emerg-
ing market and developing economies.
June 2017 | FINANCE & DEVELOPMENT 37
 Chart 1
emerging market and developing economies: a 1
percentage point decline in US output growth
Below average reduced average output growth over the following
Investment growth in emerging market and developing economies has
year in emerging market and developing economies
been low over the past three years.
(share of emerging market and developing economies with investment growth below
by about 0.8 percentage point, and a decline of the
long-term average, percent) same amount in euro area output growth did so
100 by about 1.3 percentage points within a year. Invest-
ment growth in emerging market and developing
80
economies responded almost twice as strongly (2.1
60 percentage points) as did output growth.
China’s policy-driven slowdown and rebalancing
40
from investment toward consumption also hurt
20 output growth in emerging market and developing
economies. Since China is now the largest trading
0
1990 95 2000 05 10 15 partner of many emerging market and developing
economies, its output and investment growth slow-
Sources: Haver Analytics; IMF; Oxford Economics; and World Bank, World down has weighed on their growth.
Development Indicators.
Note: Long-term averages are country specific and refer to 1990–2008. Data for For example, within a year, a 1 percentage point
2016 are estimated. The shaded areas represent global recessions and downturns. decline in China’s output growth was accompanied
by about a 0.5 percentage point decline in output
growth in other commodity-importing emerging
Chart 2 market and developing economies and a 1 percentage
Closing down point decline in output growth in emerging market
Between 2009 and 2015 the much greater per capita investment growth and developing economy commodity exporters.
in emerging market and developing economies than in advanced Since much of its investment is resource intensive,
economies disappeared. China’s rebalancing away from investment has been
(difference between per capita investment growth in emerging market and developing more harmful for commodity-exporting emerging
economies and advanced economies, percentage points)
market and developing economies.
20
15 Effect on growth prospects
10 The postcrisis investment growth slowdown from
5 record highs before the crisis could have lasting
0
implications for long-term growth. By slowing the
rate of capital accumulation, a prolonged period
–5
of weak investment growth can set back potential
–10 output growth in emerging market and developing
1991 93 95 97 99 2001 03 05 07 09 11 13 15
Source: World Bank.
economies for years. In 2009, there was about a 15
Note: Weighted averages of the difference between real investment growth rates in percentage point difference between per capita
emerging market and developing economies and advanced economies. The shaded investment growth in emerging market and devel-
areas are global recessions and downturns.
oping economies and advanced economies. By
2015, the difference was virtually zero, the lowest
Negative spillovers from major economies: Weak it has been since the early 2000s (see Chart 2).
growth in the United States and in the euro area has Because growth is one of the most powerful ways
disappointed expectations a number of times over the to reduce poverty, any setbacks to growth also
past seven years. Given the sheer size of these econo- jeopardize global goals for poverty reduction.
mies and their degree of trade and financial integration In addition to slowing capital accumulation, weak
with the rest of the world, a slowdown in their growth investment growth is associated with slower growth
significantly worsens growth prospects for emerging in total factor productivity (the part of economic
market and developing economies. growth that cannot be explained by increases in labor
Weak output growth in the United States and and capital inputs and reflects technological and effi-
the euro area weighed on investment growth in ciency changes). That’s because investment is often

38 FINANCE & DEVELOPMENT | June 2017

critical to the adoption of new, productivity-enhancing
technologies. The productivity slowdown was most
pronounced in commodity-exporting emerging
market and developing economies and in those with
the slowest investment growth. Weaker total factor
productivity growth is also reflected in slower growth
in labor productivity (output per hour worked)—the
key driver of long-term real (after inflation) wage
growth and household income growth.
Boosting investment
Many emerging market and developing economies
have large unmet investment needs (Kose and others
2017). A number of these countries are poorly
equipped to keep up with rapid urbanization and
changing demands on workers. Investment is also
needed to smooth the transition away from growth
driven by natural resources (in commodity export-
ers) or sectors that do not engage in foreign trade
(in some commodity importers) toward more
sustainable sources of growth.
Policymakers can boost investment directly,
through public investment, and indirectly, by encour-
aging private, including foreign direct, investment,
and by undertaking measures to improve overall
growth prospects and the business climate. Doing
so directly through greater public investment in
infrastructure and workers would help raise demand
in the short term, increase potential output in the
long term, and improve the environment for private
Many emerging market and
developing economies have
large unmet investment needs.
investment and trade. Public investment would also
help close income gaps, as targeted by the United
Nations Sustainable Development Goals and, under
the right conditions, has the potential to stimulate
private investment (see Chart 3).
Indirectly, macroeconomic policies can encourage
productive investment—for example, by ensuring
macroeconomic stability and improving short- and
long-term growth prospects. More effective use of
fiscal and monetary policies designed to counter
slowing or declining growth can also promote private
investment indirectly by strengthening output growth,
especially in commodity-exporting emerging market
and developing economies. These policies may be less
Chart 3
Pump priming
Public investment can stimulate private investment.
(increase in private investment after a 1 percent increase in public investment, change from
baseline, percentage points)
0.4
0.3
0.2
0.1
0
On impact After one year After two years
Sources: IMF; national sources; Kose, Ayhan, and others. 2017. "Weakness in
Investment Growth: Causes, Implications, and Policy Responses." Policy Research
Working Paper 7990, World Bank. Washington, DC.
Note: The cumulative response of private investment due to a positive shock to
public investment is based on a sample of eight emerging market and developing
economies for 1998:Q1 to 2016:Q2. Bars represent median values.
effective, however, if governments lack resources to
increase spending or reduce taxes or if output growth
is weak because of a need to adjust to a permanent
decline in revenues from commodity exports.
To raise investment growth sustainably, such pol-
icies must be buttressed by structural reforms to
encourage both domestic private and foreign direct
investment. These reforms could span various areas.
For example, lower barriers to entry for businesses
and smaller start-up costs are associated with higher
profits for existing firms and greater benefit from
foreign direct investment for domestic investment.
Reforms to reduce trade barriers encourage both
foreign direct and overall investment. Corporate
governance and financial sector reforms improve the
allocation of capital across firms and sectors. Stronger
property rights encourage corporate and real estate
investment. Such policies should be complemented
by efforts to foster transparency—that is, better
financial reporting methods.
M. AYHAN KOSE is a director, FRANZISKA L. OHNSORGE
is a lead economist, and LEI SANDY YE is an economist, all
in the Prospects Group of the Development Economics Vice
Presidency of the World Bank.
Reference:
Kose, Ayhan, and others. 2017. "Weakness in Investment Growth: Causes, Implications, and
Policy Responses." Policy Research Working Paper 7990, World Bank. Washington, DC.
June 2017 | FINANCE & DEVELOPMENT 39
WHEN MONEY CAN
NO LONGER TRAVEL
Correspondent banking relationships, which facilitate global trade and
economic activity, have been under pressure in some countries
Andreas Adriano
A
ngola, the third-largest economy in Africa,
relies on imports to keep its economy run-
ning. It is a heavyweight exporter of oil,
diamonds, and iron ore, but it imports food, med-
icine, construction materials, vehicles and parts,
and capital goods. Many sectors dependent on
imports, like construction, are at risk of coming to
a halt because importers often find it more difficult
to pay their international suppliers. Why? Because
Angola has undergone derisking—a term that
describes a complex, multifaceted problem affecting
mostly, but not only, small developing economies
whose connections to the global financial network
have been under threat.
Imagine if international airlines, like Air France,
American, Lufthansa, and United, suddenly stopped
40 FINANCE & DEVELOPMENT | June 2017
serving a country with no national airline that relies
on these companies as its link with the rest of the
world. The people and the economy would suffer:
airlines that still served the country would raise
their fares, making it costlier to import and export
and for people to travel. Fewer direct flights and
higher prices would discourage tourism.
Money travels around the world in more or less
the same way as people, and through some of the
PHOTO: ISTOCK / LEOPATRIZI; ISTOCK / NYS444
same city hubs. Someone traveling from Luanda,
Angola, to San José, Costa Rica, could fly to Europe,
then to a US airport, then to San José (or to São
Paulo, then Panama City, then San José). A wire
transfer between two countries also hops around the
globe and makes several connections, traveling usu-
ally within the networks of large global banks—Bank
of America Merrill Lynch, Citibank, Deutsche Bank,
Standard Chartered, and many others.
Derisking happens when global banks stop pro-
viding international payment services such as wire
transfers, credit card settlements, and even hard
foreign currency to a country’s local banks. In the
world of payment systems, provision of these services
is generically referred to as correspondent banking.
Without it, a bank—and therefore its clients, i.e.,
people and companies in that country—loses access
to the global financial grid.
It’s not hard to see the consequences for a devel-
oping country in a highly integrated global econ-
omy if money cannot travel. Just imagine a country
heavily dependent on tourism, as in the Caribbean,
in which hotels all of a sudden are unable to process
guests’ credit card payments or airlines can’t pay
for fuel. In fact, Caribbean countries have been
among the most affected by loss of correspondent
banking relationships.
According to a survey earlier this year by the Carib-
bean Association of Banks, 21 of 23 banks in 12
countries have lost at least one correspondent banking
relationship. Eight were operating with a single pro-
vider. Most are able to find alternative arrangements.
Countries in Africa, eastern Europe, the Middle East,
and the Pacific islands have also lost some relationships,
as has the central bank of Belize. In Angola a scarcity
of US dollars has impacted trade activity. Even large
emerging market economies such as the Philippines
and Mexico have been affected. A survey of Arab
countries found that 39 percent of 216 banks had a
“significant” decline in the scale of correspondent
banking relationships.
Motivating factors
Banks are required by law to try to prevent the pos-
sibility of seemingly routine cross-border payments
disguising money laundering, terrorism financing,
tax evasion, and corruption proceeds. In most coun-
tries, and in particular in the United States, regulation
and enforcement of these requirements has been a lot
more rigorous, as is enforcement of economic and
trade sanctions. Banks are directed to “know your
customer.” The necessary compliance structure can
be so costly that correspondent banking, a large-scale
low-margin service, could stop being profitable.
Remember the post–9/11 days, when even tod-
dlers were frisked at airports? Or how, after the
shoe bomber incident, shoe removal became stan-
dard practice at US airports? It’s much the same
with global payments. Banks are liable for all inter-
national transactions traveling through their net-
works and must “pat down” transactions from
clients that are considered risky—and obviously
stop those on the “no-fly list.” The reputational
risks are significant, and fines can be in the billions
of dollars. “The penalties and reputational damage
can be terrible,” an anti-money-laundering expert
in a global US bank tells F&D. The whole set of
circumstances “creates a toxic environment in the
financial industry.”
For banks, it’s a simple risk-reward analysis in
one portion of their many business lines. But for
a small flower exporter in a landlocked African
country, it may be the difference between doing
It’s not hard to see the consequences
for a developing country in a highly
integrated global economy.
business or not. Remittances are another potential
victim. Already costly for poor people to send, they
may become more expensive if there are fewer
providers. And in this case the trend is not just
from global to local banks. Republic Bank, one of
the Caribbean’s largest institutions, decided to
withdraw from the money transfer business and
closed the accounts of large global providers such
as Western Union and MoneyGram. “These com-
panies were the favorites of the Barbados diaspora
in Canada and the United States, so people might
have been affected,” Ian de Souza, CEO of the
Barbados subsidiary, tells F&D.
According to the World Bank’s Remittance Prices
Worldwide database, sending $200 to Jamaica costs
7.4 percent from the United States and 10.1 percent
from Canada, on average. The same amount from
South Africa to Angola can cost up to 20 percent.
The World Bank estimates that if remittance costs
fell by 5 percentage points across the board
June 2017 | FINANCE & DEVELOPMENT 41
 recipients in developing economies would get an
extra $16 billion every year.
According to a recent IMF paper, cross-border
payments have so far remained stable and economic
activity has been largely unaffected. However, in a
limited number of countries, financial fragilities have
been accentuated as their cross-border flows are
concentrated through fewer correspondent banking
relationships or maintained through alternative
arrangements. These fragilities could undermine
affected countries’ long-run growth and financial
inclusion prospects by increasing costs of financial
services and negatively affecting bank ratings.
Belize Bank, the largest in the country, had relied
on Bank of America as its sole correspondent for
35 years. In 2014, the US bank terminated the
relationship with a 60-day notice. “They never gave
us a specific reason; they just said that their strategy
was not aligned with doing business with us any-
more,” says Filippo Alario, deputy CEO and chief
risk officer, in an interview with F&D.
Alario says that most global banks are “not inter-
ested in Belize anymore,” and to keep operating,
his bank had to “be creative and do an incredible
amount of networking.” He does business now
through small banks in other countries, some
smaller than his own, and has different providers
for various services. “We are managing, but don’t
have a strong long-term solution.” He sees the
problem affecting the entire economy: “Even US
and British military training camps had problems
receiving funds.”
For Bank of America, it’s basically a matter of
scale, Stephanie Wolf, head of global financial
institutions and public sector banking, tells F&D.
She did not comment on specific cases, but she
says that the bank’s approach to global oversight
of risk across different products and jurisdictions
led it to focus on clients with more growth potential.
“Not every client will be the right fit for us.” Cor-
respondent banking is still one of the leading busi-
nesses in their corporate banking practice, “very
attractive both from the side of revenue and the
diversity of portfolio.” New clients have been added,
and the bank even provides hard currency liquidity
in many countries, one of the riskier parts of cor-
respondent banking, she adds.
42 FINANCE & DEVELOPMENT | June 2017
A mix of unclear or inconsistent regulatory expec-
tations, enhanced efforts to combat money laun-
dering and terrorism financing, weak compliance
by correspondent banks, and countries with risky
environments make derisking a complex problem.
Banks have a long list of criteria to evaluate financial
transactions’ risks. Reputation counts a lot. For
example, a bank may consider a Colombian client
riskier in principle than one in Chile because of
the former country’s history of drug cartels, explains
the US-based anti-money-laundering expert.
Certain businesses are riskier than others, like
casinos. “A cash-intensive business is considered
riskier than one relying more on electronic pay-
ments. Businesses with government contracts are
riskier than private sector ones. A politician is riskier
than a lawyer, who is riskier than a business man-
ager,” he explains. So-called politically exposed
persons raise a red flag: cabinet members, lawmak-
ers, and executives of public companies get deeper
and more frequent scrutiny.
Most countries have strengthened their compliance
with the recommendations of the Financial Action
Task Force, the intergovernmental body that sets
and enforces standards and practices for combating
money laundering and terrorism financing. But a
number are only partially compliant. Legislation
that is indeed too lax, sometimes because of political
circumstances, is a frequent problem, as is weak
implementation. If too many politicians and their
families are involved in business, it is not in their
interest to approve local regulation of politically
exposed persons. So it is harder for a foreign bank
to vet a transaction properly, which could expose it
to enforcement actions by its regulator. Some will
however argue that international pressure may be
the only way to force change in such situations.
Finding alternative routes
What’s a derisked bank to do? Like an obstinate
traveler, it will seek alternative flights and routes.
In most affected countries, banks have figured
out ways to continue doing business. One possible
fix is to nest transactions with those of an inter-
mediary bank that continues to have correspon-
dent banking relationships. Angola is routing
more transactions through South Africa and
Continued improvement in countries’ standards for combating
money laundering and terrorism financing is crucial to provide
the confidence required by correspondent banks.
Portugal. Belizean banks have even resorted to
Turkish providers. Diversifying foreign currencies
if one becomes scarce is another possibility.
However, experts warn it may just be a matter
of time before the process catches up with banks
again. A global bank would likely ask a Portuguese
bank about Angolan transactions folded in with
domestic businesses. It’s not implausible that the
Portuguese bank could eventually lose its own
correspondent banking accounts in the process.
Most important, the search for short-term fixes
could lead companies and banks to resort to
unorthodox schemes and less-than-reputable
providers to continue operating. This may have
the unintended consequence of pushing pay-
ments into informal channels.
A long-term, sustainable solution to the problem
demands action on many fronts—and by a varied
cast of policymakers in countries and international
institutions, as well as in the private sector. Overall,
it is key for the derisked bank to enhance its capacity
to manage risks, and to communicate progress
made, to build trust with global banks. If capacity
cannot be achieved at the individual bank level,
consolidating transactional traffic and terminating
certain high-risk business lines may be needed to
address correspondent banks’ concerns about risk
management. Some progress is already underway.
Raising awareness about the complexity and seri-
ousness of the problem was a first step, and not a
trivial one. Belize Bank’s Alario recalls that when
his bank first raised the issue with US authorities
and international institutions, “blame from every
quarter was put on us.”
Lobbying and joint action by countries, coupled
with more research by international institutions,
have already achieved significant improvements.
Clarifying expectations by different regulatory bodies
is an important step. Guidelines issued last August
by the US Treasury Department that attempt to
harmonize expectations among numerous US
government regulators are widely seen as an import-
ant milestone. The guidelines clarify that there isn’t
a zero tolerance expectation and that many fines
were applied in cases of deliberate wrongdoing.
Measures suggested to address the problem
include lowering compliance costs through industry
initiatives (technology can help banks know their
clients better and offers alternative channels for
remittances). Continued improvement in countries’
standards for combating money laundering and
terrorism financing is crucial to provide the level
of confidence required by correspondent banks.
Banks have been active as well. Standard Chartered,
a UK bank with a large presence in Asia, established
a correspondent banking training program to help its
clients, local banks, and the clients’ clients comply
with anti-money-laundering and terrorism financing
rules. The program is active in 23 countries.
Mexico, a major emerging market economy also
affected by the loss of correspondent banking rela-
tions, has been active on several fronts. In some
countries, privacy laws forbid subsidiaries of the
same global bank to exchange information about
clients’ risk profiles. So Mexico amended its legal
framework to facilitate this cross-border information
sharing. It also established a domestic US dollar
payment system and uses the central bank’s corre-
spondent banking relations to facilitate transfers.
In the air transportation business, stricter security
has usually meant small individual sacrifices in
exchange for greater general safety. It can likewise
be argued that, by cracking down on financial
crime, tighter international regulations also achieve
a global good. The problem is that these regulations
may affect legitimate people and businesses as well,
not just suspicious ones. Good money has had
difficulty traveling, as have good people recently,
and this should not happen.
ANDREAS ADRIANO is a senior communications officer in
the IMF’s Communications Department.
June 2017 | FINANCE & DEVELOPMENT 43
 PICTURE THIS

FUELING REFORM
Energy subsidy reforms are challenging, but many countries are making progress
ENERGY SUBSIDIES ARE policy measures that aim to
lower the cost of energy consumption. In 2015,
these subsidies amounted to 6.5 percent of global
GDP, or roughly $5.3 trillion. Subsidies have many
negative economic and environmental effects, and
they primarily benefit the wealthiest households.
Despite this, they have proved difficult to reduce
or remove. But in recent years a few factors may
have shifted the balance to provide incentive for
reform: subdued growth since the global financial
crisis, lower energy prices since a sharp decline in
mid-2014, and pledges to reduce greenhouse gas
emissions signed by 190 countries as part of the
December 2015 Paris Agreement.
In fact, at least 32 countries have actively reformed
their subsidies since mid-2014. More than half of
them are oil exporters and have had to make up for
declining oil revenues. Most of these oil-exporting
countries faced much larger fiscal deficits than oil
importers did. Environmental concerns have been
another driver in some countries—which have intro-
duced a carbon tax, raised carbon tax prices on top
of existing systems, or announced their own emis-
sion-trading systems. And recent reforms benefited
from lessons of past experiences, which makes them
more likely to succeed.
Successful energy subsidy reform has six key
ingredients according to IMF research, and many
recent reforms have incorporated them in their
designs: a comprehensive plan with clear long-term
objectives, transparent communication with stake-
holders, phased-in price increases, more efficient
state-owned enterprises, measures to protect the
poor, and depoliticized pricing mechanisms.
In addition, energy subsidy reforms that are
driven by long-term considerations, such as address-
ing environmental concerns or reducing oil depen-
dency, are likely to be more durable than those
driven by short-term factors, such as budget deficits
resulting from lower oil revenues.

Why is energy subsidy reform important?

Getting energy prices right could:

Reduce global carbon

emissions by
Reduce fossil fuel air
pollution deaths by Generate 3.5% Alleviate

income

24% 57%
of global GDP, so countries could
reduce inefficient taxes or expand inequality,
priority public spending on health as subsidies largely
care, education, etc. benefit the rich

44 FINANCE & DEVELOPMENT | June 2017

 PICTURE THIS

When is the right time? What kinds of

Now!
The sharp drop in international energy prices since mid-2014 creates an
reforms are being
opportunity for energy importers to remove their subsidies, and puts pressure on
energy exporters to reform theirs. implemented?
Raising government-set prices
(Angola, Egypt, Ukraine)
200

160
Liberalizing energy prices or
120 introducing an automatic pricing
mechanism (India, Madagascar,
80
United Arab Emirates)
40

0 Introducing an emission trading

system or carbon tax, or
raising carbon prices (Mexico,
Portugal, South Africa)
And greenhouse gas reduction pledges submitted by over 190 countries in 2015
provide further impetus for change.

Where are reforms taking place?

= oil exporters
= others

32
ART: SHUTTERSTOCK / NNNNAE; ISTOCK / CHOKKICX ; ISTOCK / ILYALIREN

countries More than half (17) of these

reformed their
subsidies since
mid-2014 by raising energy prices:
Algeria, Angola, Bahrain, Chile, China, Côte d’Ivoire, Egypt, France, Gabon,
Ghana, India, Indonesia, Iran, Jordan, Kazakhstan, Korea, Kuwait, Madagascar,
Malaysia, Mexico, Morocco, Oman, Portugal, Qatar, Saudi Arabia, South Africa,
Sudan, Thailand, Tunisia, United Arab Emirates, Venezuela, and Yemen
32 countries are oil exporters
Prepared by MARIA JOVANOVIĆ. Based on research by Amyra
Asamoah, Emine Hanedar, and Baoping Shang of the IMF’s
Fiscal Affairs Department. For more on the IMF’s work on energy
subsidy reform, visit imf.org/subsidies.

June 2017 | FINANCE & DEVELOPMENT 45

 IN THE TRENCHES
Carrying out long-lasting and meaningful economic reform isn’t easy. The benefits often show up years later, while the pain is felt immediately. In our new
series, “In the Trenches,’’ policymakers describe the challenges of pushing through reforms aimed at stronger growth, higher productivity, and more jobs.
PHOTO: PETER ANDREWS/REUTERS/NEWSCOM
Window of Opportunity
Leszek Balcerowicz explains why it’s
important to move quickly when citizens are
willing to embrace change
LESZEK BALCEROWICZ, the architect of Poland’s
transition to a free-market economy, began studying
ways of reforming the country’s Soviet-style system
in the 1970s. He later became an advisor to the
Solidarity trade union movement. For two years
starting in 1989, Balcerowicz served as finance
minister and deputy prime minister under Tadeusz
Mazowiecki, who headed the first noncommunist
government in Eastern Europe since World War
II. Balcerowicz again assumed those posts from
1997 to 2000 and served as central bank president
from 2001 until 2007. He holds a PhD in eco-
nomics from the Central School of Planning and
Statistics in Warsaw (now the Warsaw School of
Economics), where he still teaches.
In this interview with F&D’s Chris Wellisz,
Balcerowicz recalls the intensity of his first stint as
finance minister and tells how he sought to over-
come the obstacles he encountered by exploiting
a narrow window of “extraordinary politics.”
F&D: In the 1970s you put together a team of
economists to study ways to reform the existing
46 FINANCE & DEVELOPMENT | June 2017
socialist system. You said this work was like a
hobby, because the prospect for reform seemed
slim. Then martial law was imposed in December
1981. What happened next?
LB: After the introduction of martial law there was
no hope for any major reforms. … However, we
continued our work, but this time without any
limitations. So we studied privatization, liberaliza-
tion, fiscal reforms. … We, of course, did not
assume that this would be useful in our lifetime.
F&D: Then came the so-called Round Table talks
between Solidarity and the Communist govern-
ment, which were followed by elections that
resulted in a new government under Mazowiecki.
You have said you would take the job, but only
under certain conditions. What were they?
LB: First, that the economic reform would be mas-
sive, rapid, and radical. Second, that I would enter
the government with a group of people, the team.
Third, that I would chair, as the deputy prime
minister, the economic committee of the council
of ministers as a sort of coordination device of all
the economic ministries. At the same time, I
accepted the position of minister of finance. And,
fourth, that I would have a say in who would take
the economic portfolios.
F&D: What was your assessment of the
economic situation?
LB: [It] was dramatic; output was falling. We had
hyperinflation. We had a very large foreign debt.
But I realized only after I accepted the job that the
situation was even worse, because it turned out we
had some hidden domestic debt.
F&D: How did you decide on a strategy?
LB: First, we knew … that once a country is struck
by hyperinflation, you must be very quick to reduce
the pace of the printing of money. Second, we knew
from our studies of previous reforms under socialism,
and in some other countries—but especially under
socialism—the initial dose of changes must be very
large and very quick. [We also knew] that the changes
should not be sequential. Major changes should start
around the same time, as a package.
F&D: Why was that so important?
LB: After a breakthrough like in Poland in 1989
there’s a short period of what I called “extraor-
dinary politics,” a window of opportunity, if you
 IN THE TRENCHES
will, that people were more ready than normal
to accept radical changes. And the best use of
this gift of history was to move very fast on a
broad front which … we did in Poland. A very
rapid stabilization and massive liberalization of
the economy, which included dismantling of most
domestic monopolies. …
F&D: What was your most pressing challenge when
you first took office?
LB: The main problem was to stop hyperinflation.
Technically it was easy. We had to slow down the
printing of money, so it was largely a fiscal chal-
lenge. At the same time, we introduced the inde-
pendence of the central bank.
F&D: What about the currency? It wasn’t convertible
at the time, and there was a flourishing black market
in dollars.
LB: One of the greatest reforms which we intro-
duced was the unification of the rate of exchange
and the introduction of the convertibility of the
currency, and this was sort of a revolution because
people could legally import goods. And this
enhanced supply competition.
F&D: How did you decide on a currency regime?
LB: We opted for a fixed rate of exchange for a time
which was very difficult to determine. There was
an argument coming from the IMF which I
accepted then, that Poland needs a nominal anchor
to stop hyperinflation. And it was, of course,
extremely difficult to say exactly at what level the
Polish zloty should be stabilized—at what rate of
exchange. But we had to make the decision.
F&D: You were new to politics. How did you find
that transition?
LB: I did not enter politics for the sake of politics.
I was asked to do a job. And the job was of historical
proportions. We didn’t need lots of public com-
munication and persuasion because we had the
parliamentary majority—the Solidarity move-
ment—and delaying change in order to make a lot
of explanation would be wasting very precious time.
So this was politically pretty easy.
F&D: A million people lost their jobs. Were you
concerned about the political cost?
LB: This is a widespread myth, because, first,
people associate social cost with reforms, while
delaying reforms brings about much larger social
costs. … Secondly, on unemployment, you have
to remember there was a lot of hidden unem-
ployment in the socialist enterprises. And some
of this hidden unemployment became open. And
third, the initial law on unemployment benefits
was too lax.
F&D: What was the main accomplishment of
Poland’s reforms?
LB: Poland was lagging behind the West econom-
ically for the last 300 years, so the gap was growing,
especially after the Second World War. And only
because of market reforms after ’89 did we start to
catch up. And we moved from about 30 percent
of per capita income in Germany in 1989 to about
60 percent. This is the first time in Poland’s history
of the last 300 years that Poland has been rapidly
converging with the West.
F&D: Were you concerned that voters would asso-
ciate reforms with economic pain?
LB: For the first two years, there were no massive
social protests and there were few political protests.
With the passage of time, as in every country, there
were politicians who tried to gain political capital
from the criticism of what they called harsh or
inhuman economic reforms.
F&D: Was there anything that was left undone that
you wished you could have accomplished?
LB: If I had more people with whom I could
work, I would have made more changes in the
inherited social system, pension reforms and
health reforms.
F&D: Does your experience have relevance today
for policymakers in other countries?
LB: There are a lot of quasi-socialist economies that
are dominated by the state sector. ... in these coun-
tries, the situation to some extent is comparable to
that which existed in Poland and other socialist
countries in 1989.
F&D: When you look back at that time, what are your
personal reflections on the role that you played?
LB: Even at the beginning of 1989 I did not dream
that Poland would be free and I would play a role
in its transformation. This was, of course, not easy,
but if something goes beyond your dreams you
can’t complain.
June 2017 | FINANCE & DEVELOPMENT 47
Beyond the Headlines
Migration from sub-Saharan Africa has
far-ranging effects on home and host
countries alike
Jesus Gonzalez-Garcia and Montfort Mlachila
I
nternational migration has been in the headlines
for the past few years: a surge of refugees to
Europe, especially from the Middle East and
Africa, has spurred the ongoing refugee crisis. A
backlash has followed in many countries, including
within sub-Saharan Africa.
Developing economies tend to receive more
immigrants relative to their population than
advanced economies. Refugees make the headlines,
but in sub-Saharan Africa longer-term migration,
within and outside the region, strongly affects the
continent’s economies.
In 2013, about 20 million sub-Saharan Africans,
twice the 1990 number, were living outside their
48 FINANCE & DEVELOPMENT | June 2017
own country—13 million of whom had migrated
within the region (see Chart 1).
The demographic boom in sub-Saharan Africa’s
working-age population—which typically feeds
migration—means the trend will continue for
decades. The current 2 percent migration rate
(migrants as percent of population) in sub-Saharan
Africa is low relative to the rest of the developing
world, where 3 percent of the population live abroad.
But it has kept up with the rapid growth of the
region’s population as a whole—from about 480
million in 1990 to about 900 million in 2015.
Where are they going?
Most migration occurs within the region (see
Chart 2). People who move for economic reasons
tend to look for opportunity in wealthier neigh-
boring countries.
ART: ISTOCK / ROUTE55
Why do Africans move to other African countries
proportionately more than to richer countries? One
reason is economics. The poor cannot afford a plane
 Chart 1
People on the go
An increasing proportion—but still a minority—of sub-Saharan
migrants move out of the region.
(stock, millions of migrants)
20
Within sub-Saharan Africa
ticket to Europe or the United States, but they can 16 In the rest of the world
jump on a bus or truck, and borders within Africa 12
are porous. Cultural and linguistic affinity also
plays a role. 8

4
Gonzalez, corrected 4/24/17
Forced migration
The number of refugees—people fleeing war or 0
1960 70 80 90 2000 10 13
persecution—is much lower in Africa since 1990,
Source: World Bank, Migration and Remittances database.
both within and outside the region. About half of
migrants were refugees in 1990, down to about 10
percent by 2013 thanks to fewer large-scale conflicts
in the region (see Chart 3). Chart 2
Five conflict-affected countries are the main Close to home
sources of intra-African refugees: the Central African Côte d’Ivoire and South Africa receive most sub-Saharan African migrants.
Republic, the Democratic Republic of the Congo, (top receiving countries, 2013, (top migration corridors, 2013,
stock, millions of migrants) stock, millions of migrants)
Somalia, Sudan, and South Sudan. Those from
Somalia found refuge in Kenya and Ethiopia, refu- Rwanda Benin–Nigeria
Ghana Sierra Leone–Guinea
gees from Sudan migrated to Chad, and South Congo, Rep. of Burundi–Tanzania
Sudanese have been largely displaced within their Uganda DRC–Congo, Rep. of
own country and have gone to Uganda. Sub-Saharan Tanzania Lesotho–South Africa
Cameroon Mozambique–South Africa
Africa hosts the largest refugee camps in the world, Burkina Faso Mali–Côte d'Ivoire
with substantial fiscal costs for the host countries, Nigeria Côte d'Ivoire–Burkina Faso
estimated at 1 to 5 percent of GDP. South Africa Zimbabwe–South Africa
Gonzalez, 4/18/17
Côte d'Ivoire Burkina Faso–Côte d'Ivoire
Both forced migration and migration for economic 0 0.5 1.0 1.5 2.0 2.5 0 0.5 1.0 1.5
reasons can bring friction. The cost of hosting ref-
ugees and social tension in countries receiving large Source: World Bank, Migration and Remittances database.
Note: DRC = Democratic Republic of the Congo.
numbers of migrants seeking jobs, services, and
opportunities can be difficult to manage.
Migration to the rest of the world is growing faster Chart 3
than within the region. About 6.6 million sub-Saharan Job hunters
African migrants—one-third of the total—lived out- Refugees are a smaller proportion of intra–sub-Saharan African
side the region in 2013, more than double the number migration compared with a quarter century ago.
in 1990. The composition has changed markedly: in (stock, millions of migrants)
1990 about 40 percent moved for economic reasons, 14
which had risen by 2013 to 90 percent. But the rate 12 Refugees
Rest of migrants
of global migration in sub-Saharan Africa is the lowest 10
in the world, at 0.7 percent of the region’s total pop-
8
ulation. That rate is about seven times larger in Latin
America and the Caribbean and four times larger in 6
the Middle East and northern Africa. 4
2
Why move? 0
1990 2000 10 13
Migration within Africa is driven mostly by geo-
graphic proximity, differences in income, and war Sources: United Nations High Commissioner for Refugees database; and
World Bank, Migration and Remittances database.
in the home country, along with cultural links and
environmental factors such as droughts or floods.
Côte d’Ivoire and South Africa are among the recip- the sub-Saharan African diaspora is in countries
ients of the largest number of intraregional migrants. belonging to the Organisation for Economic Co-
Migration to the rest of the world is driven mainly operation and Development (OECD)—France, the
by economic opportunity, and the primary destina- United Kingdom, and the United States host about
tions are advanced economies. About 85 percent of 50 percent of sub-Saharan African migrants.

June 2017 | FINANCE & DEVELOPMENT 49

 Chart 4
Help wanted
As the working-age population of the rest of the world continues to
plunge, sub-Saharan Africa can provide workers via migration.
(cumulative changes for five-year periods, millions)
300 Rest of the world
Sub-Saharan Africa
240 OECD
180
120
60
0 income gaps between sub-Saharan African and
–60
1955 65 75 85 95 2005 15 25 35 45
Source: United Nations, World Population Prospects.
Note: OECD = Organisation for Economic Co-operation and Development.
Shaded area represents projections.
Remittances are the biggest benefit for home
countries. Inflows of money from expatriates have
increased rapidly and are now one of the largest
sources of external finance for developing econ-
omies, at 3½ percent of GDP in 2015. Remit-
tances have leapfrogged foreign direct investment
as the largest source of foreign exchange for devel-
oping economies, partly because the latter has
declined sharply.
Remittances tend to be more resilient during
economic downturns than foreign direct investment
and official development assistance. After the global
financial crisis, they dropped slightly in 2008 and
2010, recovered in 2011, and have grown ever since.
Remittances play an important macroeconomic
role in sub-Saharan Africa. They are a source of
foreign exchange and income, contributing more
than 20 percent of GDP in The Gambia, Lesotho,
and Liberia. They supplement the income of poor
households, which can save some to invest in human
and physical capital, which raises productivity and
growth over time. Remittances also help mitigate
the effects of macroeconomic shocks from natural
disasters and conflict.
But emigration does harm the home country. The
brain drain following the departure of skilled and
qualified workers reduces productive capacity and
long-term growth.
Evolving demographics
The demographic transition in the region will
shape future migration. Not only will the region’s
population continue to increase—from about 900
million in 2013 to 2 billion in 2050—but the
working-age population, which typically feeds
migration, is set to increase even faster—from
about 480 million in 2013 to 1.3 billion in 2050
(see Chart 4). This reflects the region’s continued
50 FINANCE & DEVELOPMENT | June 2017
population growth—total population has increased
fourfold since the 1960s—declining fertility rate,
and lower infant mortality rate, which is half what
it was in 2000.
These demographic trends and persistently large
advanced economies will likely drive more migra-
tion. The ratio of sub-Saharan African migrants to
the total population of their new homes in OECD
countries is projected to increase sixfold, from about
0.4 percent in 2010 to 2.4 percent by 2050—
through a combination of more migration from
the region and slow expected population growth
in the OECD.
Better policies
Migrant workers can help receiving countries grow,
especially where the population is aging rapidly
(Jaumotte, Koloskova, and Saxena 2016). They bring
additional tax revenues and social contributions in
their new homes to support retired workers. Remit-
tances will continue to support relatives’ living
standards, help alleviate poverty, and play a role as
a stable source of foreign exchange.
Since migration within and outside sub-Saharan
Africa will likely continue to expand in the coming
decades, countries must design policies that help
migrant workers adapt socially and economically in
the host economies for all to benefit.
Population growth calls for policies that generate
jobs in home countries. In countries receiving
migrants, the boost to the labor force should com-
pensate for aging and declining domestic popula-
tions, which is good for both economic growth and
taxes in the long run. The boost to growth and taxes
should ease social tension from concern about dis-
placement of native workers and fiscal costs while
increased international support to countries that
host refugees would go a long way toward reducing
fiscal and other related social costs.
JESUS GONZALEZ-GARCIA is a senior economist in the IMF’s
African Department, and MONTFORT MLACHILA is the IMF’s
senior resident representative in South Africa.
References:
Gonzalez-Garcia, Jesus, and others. 2016. “Sub-Saharan African Migration: Patterns and
Spillovers.” IMF Spillover Note 9, International Monetary Fund, Washington, DC.
Jaumotte, Florence, Ksenia Koloskova, and Sweta Saxena. 2016. “Impact of Migration on
Income Levels in Advanced Economies.” Spillover Note 8, International Monetary Fund,
Washington, DC.
FROM
HUNGRY
TO HEFTY
Obesity and diabetes threaten emerging market economies, but the right policies can help
Eduardo J. Gómez
T
he prospects for emerging markets look good,
but rich country diseases like obesity and Type
2 diabetes pose a new threat to their improved
economic outlook.
In recent years, Brazil, for example, has done
more than China, India, or Mexico to strengthen
the government’s commitment to prevention and
treatment programs, helped by an enduring part-
nership with civil society.
Since the 1990s, similar circumstances have
contributed to the rise of obesity and Type 2 dia-
betes in these countries. With increased interna-
tional trade came an influx of fatty foods accessible
to all. Technology such as computers and mobile
devices led to less physical activity and contributed
to weight gain; in most of these countries, lack of
access to public parks and poor environmental
conditions also discourages exercise.
In Mexico, roughly a third of the population is
now obese, and the proportion of obese children is
the highest in the world. Type 2 diabetics in Mexico
are expected to double in number by 2050. In India
as well, obesity has surged, and children are afflicted
in both urban and poor rural areas. India’s Type 2
diabetes rate is 10 times what it was in the 1970s,
and by 2030 there are expected to be 100 million
diabetics. In China, more than 120 million people
are now obese; its diabetic population is the largest
in the world (French and Crabbe 2010). Brazil’s
obesity and Type 2 diabetes rates have also surged
in the past two decades.
Big price tag
Obesity and diabetes carry a hefty price tag. In
Mexico, obesity and its associated diseases cost the
government’s health care system between $4.3 billion
and $5.4 billion a year. Costs for diabetes programs
and treatment rose from $318 million in 2005 to
$343 million in 2010. In 2012, the government also
disbursed about $4 billion on diabetes-related spend-
ing (for example, hypertension, heart disease),
including for treatment, primary care services, and
ART: MIXED MEDIA / ISTOCK
research. Unchecked, according to Dr. Abelardo
Avila Curiel of Mexico’s Salvador Zubiran National
Institute of Medical Science and Nutrition, the costs
could demolish the health care system by 2030.
June 2017 | FINANCE & DEVELOPMENT 51
 In India, obesity is projected to strain the gov-
ernment’s health care budget—and the economy—
due to work days lost. Moreover, government
expenditures on Type 2 diabetes patients ranged
from $25 billion to $38 billion in 2010, mostly on
medication and hospitalization (Yesudian and others
2014). Within the next decade, the government is
expected to spend roughly $237 billion on health
care related to diabetes, stroke, and heart disease.
In China, in 2009, the government is estimated
to have spent $3.5 billion treating obese patients.
Recent estimates suggest that diabetes treatment
costs the government about $25 billion a year, and
it’s expected to reach $47 billion by 2030, which
could easily overwhelm the health care system.
Brazil’s government costs for patients with obe-
sity—often for treatment of ailments such as high
blood pressure, diabetes, and cancer—rose from $5.4
million in 2008 to $10.4 million in 2011 and could
reach $10 billion by 2050. Type 2 diabetes costs—
including for hospitalizations, diagnostic tests, treat-
ment, and primary care services—rose from $20.1
million in 2008 to $28.3 million in 2011, almost half
of that for medications.
Government response
In 2008, the Mexican government, private sector,
and civil society agreed on the need to promote
exercise and a better diet. The Ministry of Health
52 FINANCE & DEVELOPMENT | June 2017
launched the National Strategy for the Prevention
and Control of Overweight, Obesity and Diabetes
in 2014. The initiative promotes healthy lifestyles,
improves primary health care services, and advocates
regulations and fiscal policies such as snack taxes.
That year, Congress approved a soda tax of 1 peso
a liter and an 8 percent tax on high-calorie foods.
But the tax didn’t temper Mexicans’ thirst for
sugary drinks: consumption actually increased
slightly from 19.4 billion liters in 2014 to 19.5 billion
in 2015. Add to this conundrum an ongoing short-
age of primary health care personnel and unreliable
access to diabetes medication, which forces many
people to pay out of pocket even when they have
access to government-provided health insurance.
In 2008, India’s Ministry of Health & Family
Welfare introduced the National Programme for
Prevention and Control of Diabetes, Cardiovas-
cular Disease and Stroke. This initiative focused
on early diagnosis, lifestyle changes, and improve-
ments in primary health care. However, an inad-
equate health care infrastructure and a shortage
of medical specialists and primary health care
workers has hampered implementation efforts.
China’s Ministry of Health has worked with
schools to improve nutrition and physical activity
and established the Chronic Disease Comprehensive
Prevention and Control Demonstration program
in 2010 to join with provincial governments to
promote physical fitness and improved nutrition.
The National Plan for NCD (Noncommunicable
Disease) Prevention and Treatment (2012–15)
boosted efforts to improve school nutrition and
student fitness, strengthen primary health care
systems, increase media awareness, and promote
healthy lifestyles.
But only 25 percent of diabetics receive proper
treatment, such as reliable access to medication
and primary health care. Despite the obesity and
diabetes prevention programs of the past decade,
public awareness, healthier lifestyles, and early
detection of diabetes have not progressed. A con-
tinued dearth of health care workers, especially
in rural areas, and lack of coordination by the
health ministry with provincial governments have
further blocked policy implementation.
In Brazil, the Ministry of Health developed a stra-
ART: MIXED MEDIA / ISTOCK
tegic action plan in 2010 to combat noncommuni-
cable diseases. The plan includes guidelines for better
nutrition and school nutrition programs and boosts
federal funding for obesity awareness and for health
care workers to implement prevention programs.
Legislation had already been passed in 2007 that
guarantees free distribution of diabetes medication—
absent in China, India, and Mexico. Access to med-
ication expanded further in 2011 with the “Health
Has No Price” program. The ministry continued its
commitment to diabetes surveillance, prevention,
medication, and primary health care. Combined with
well-staffed primary health care teams working with
state governments, schools, and families, these policies
helped dramatically increase access to medication and
prevention services. (Gómez 2015)
Obstacles to success
Mexico’s policy shortcomings reflect political chal-
lenges. Despite consensus within the government
that obesity and diabetes must be addressed, aggres-
sive lobbying by the fast-food industry and the
government’s priority on economic growth over
public health mean limited congressional support
for the Ministry of Health’s policy goals. Moreover,
efforts to influence health policy made by the Mex-
ican Alliance for Health and Nutrition, a consortium
of 20 nongovernmental organizations, have been
stymied by limited resources and lack of access to
influential politicians (Barquera 2013).
In India, the government’s continued lack of
political commitment to policy reform has been
fueled by parliamentary disagreement over whether
obesity and diabetes pose a serious public health
threat. Those who suffer from these ailments are
relatively rich, while most of the population is still
malnourished and poor. Meanwhile, India’s non-
governmental organizations have failed to influence
policy, largely because of government indifference
to their views and the organizations’ lack of
resources and poor management.
In China, although the government has stepped
up efforts to fight obesity and diabetes, politicians
have focused primarily on the economy and national
security. Government officials have had no incentive
to strengthen the Health Ministry’s policy response.
What’s more, nongovernmental organizations are
not lobbying the government about obesity policy,
and health officials have not committed to incorpo-
rating these organizations’ policy views. The Chinese
Diabetes Society is well organized and funded but
focuses more on research and public awareness than
on criticizing and lobbying the government.
In contrast, Brazil’s government got the politics
right when it came to obesity and diabetes. The
Congress’s historic commitment to universal health
care, coupled with the Health Ministry’s strong track
record on poverty and malnutrition, paved the way
for support for the policy endeavors. Unlike in China,
India, and Mexico, this political support led not
only to earlier national conferences and government
recognition of the dangers of obesity and diabetes
but also to innovation in primary care. Brazil is the
only emerging market economy recognized by the
International Obesity TaskForce—in 2010—for its
innovative policy response.
By the early 2000s, several nongovernmental
organizations, such as the Brazilian Association of
Nutrition and the Brazilian Diabetes Society, began
to pressure the ministry to adopt supportive leg-
islation. Unlike in China, India, and Mexico,
health officials were also committed to working
with these organizations through the National
Council on Food and Nutritional Security.
Obesity and Type 2 diabetes pose a serious public
health and economic threat in Brazil, China, India,
and Mexico. Political leaders have implemented
innovative prevention and treatment programs. But
unless they are fully supported by all government
stakeholders and the private sector, and in close part-
nership with civil society, as in Brazil, these policies
will fail. Cases of obesity and diabetes will inevitably
increase, as will debilitating costs to these nations’
health and economic systems.
A healthy and productive workforce calls for an
environment in which politicians strengthen their
commitment to working with local governments
to implement policy while learning from civil
society how to improve health care services.
EDUARDO J. GÓMEZ is an associate professor in the Depart-
ment of International Development at King’s College and author
of the forthcoming book Geopolitics in Health: Confronting
Obesity, AIDS, and Tuberculosis in the Emerging BRICS Economies.
References:
Barquera, S., I. Campos, and J. A. Rivera. 2013. “Mexico Attempts to Tackle Obesity: The
Process, Results, and Push Backs and Future Challenges.” Obesity Reviews 14 (2): 69–78.
French, Paul, and Mathew Crabbe. 2010. Fat China: How Expanding Waistlines Are Chang-
ing a Nation. New York: Anthem Press.
Gómez, Eduardo J. 2015. “Understanding the United States and Brazil’s Response to
Obesity: Institutional Conversion, Policy Reform, and the Lessons Learned.” Globalization
& Health 11 (24): 1–14.
Yesudian, Charles, Mari Grepstad, Erica Visintin, and Alessandra Ferrario. 2014. “The
Economic Burden of Diabetes in India: A Review of the Literature.” Globalization and
Health 10 (80): 1–18.
June 2017 | FINANCE & DEVELOPMENT 53
 Beating Back
EBOLA
Nimble action on the economic front was key to
overcoming the health crisis
Mehmet Cangul, Carlo Sdralevich, and Inderjit Sian
I
n March 2014, the largest Ebola virus disease
outbreak in history presented West Africa and
the international community with an unprec-
edented public health crisis. From late 2013 to early
2016, the disease claimed more than 11,000 lives
and infected over 28,000 people (see Chart 1).
Ebola also caused an economic crisis, triggered
by massive health and social spending and com-
pounded by the almost simultaneous collapse in
commodity prices. Already under strain before the
epidemic hit, the health and social systems of the
governments of Guinea, Liberia, and Sierra
Leone—the countries most affected by the epi-
demic—were overwhelmed.
Unprecedented epidemic
The world woke up slowly to the reality of the
Ebola epidemic. While the first known patient was
infected in December 2013 in Guinea, it was not
until three months later that the World Health
Organization (WHO) officially declared an Ebola
outbreak in the region. By then, the virus had
already spread to neighboring Liberia and Sierra
Leone as a result of porous borders and high pop-
ulation mobility in the region.
Ebola is a lethal infectious disease. The number
of deaths started rising sharply, reaching more than
10,000 by the end of March 2015 (see Chart 2).
The fatality rate was about 40 percent on average
but was close to 70 percent in the initial phase of
the epidemic.
With casualties rising, domestic authorities in the
Ebola-stricken countries struggled to contain the
54 FINANCE & DEVELOPMENT | June 2017
virus’s spread. Constrained financial capacity to deliver
emergency health care, confusion surrounding the
transmission of the virus, and burial practices that
spread the disease posed significant challenges for a
region that had little experience dealing with public
health disasters on such a scale.
In addition to the initial delays in diagnosing the
epidemic, international health agencies were also
grappling with ways to contain the disease, resulting
in slower mobilization of international support than
was warranted. The lack of a cure or vaccine further
complicated containment. And concerns about a
pan-African epidemic or even a global pandemic grew
only after cases emerged in Nigeria, Senegal, and Mali
and as far away as Europe and the United States.
Collapse in economic activity
As the epidemic spread, tourism collapsed in the
region, foreign direct investment fell, and trade and
services were severely reduced, especially in densely
concentrated urban areas. While agricultural pro-
duction—largely for domestic consumption—was
less affected, the trade of agricultural goods was
stifled by wide-scale quarantine measures. Entire
villages and communities were sealed off, sometimes
 for months, to isolate and limit the transmission of
the disease, which proved extremely resilient to
human efforts to contain it.
These measures dramatically increased food
shortages. Two-thirds of households in Sierra Leone
were reported to lack easy access to food in June
2015. Quarantines and the closure of borders
between countries also led to a plunge in regional
trade: potato exports from Guinea to Senegal fell
more than 90 percent in the year ending in August
2014. At the same time, the collapse in demand,
restrictions on the movement of goods and people,
and the delay or cancellation of investment
increased unemployment.
A collapse of global prices of commodities com-
pounded the crisis in the three Ebola-stricken coun-
tries. GDP in Sierra Leone declined more than 20
percent in 2015. The fall in growth was less severe
in Guinea and Liberia, where mineral production
was relatively less affected. For all three countries,
medium-term growth prospects deteriorated signifi-
cantly (see Chart 3).
Because of the collapse of economic activity, the
public finances of the three Ebola-stricken countries
deteriorated abruptly. Government revenues in the
three countries declined by almost 3 percentage
points of GDP on average between 2013 and 2015,
with Liberia accounting for the largest drop. At the
same time, governments—under pressure to deliver
emergency health care services and increase contain-
ment efforts—increased public spending by almost
5 percentage points of GDP over the same period.
Liberia witnessed the largest increase, at more than
9 percentage points of GDP.
Rapid, flexible response
With the impact of the epidemic escalating, a coor-
dinated global response and relief effort proved
essential to stem the spread of the disease and limit
the human suffering and economic deterioration in
countries that were still recovering from war and
political instability. The international community
responded by focusing on addressing the health
emergency and providing financial support, disburs-
ing $5.9 billion in aid.
ART: SHUTTERSTOCK / RUDALL30
The immediate concern was providing rapid
medical assistance to overwhelmed domestic health
agencies. With a well-established presence in the
region, Doctors Without Borders moved in March
2014 to set up isolation facilities and manage
June 2017 | FINANCE & DEVELOPMENT 55
 Cangul, corrected, 5/3/2017
Chart 1
Unprecedented health crisis
From 2014 to 2016, the Ebola virus claimed over 11,000 lives, in stark contrast with previous outbreaks, which killed fewer than 1,600
people over four decades.
Ebola Outbreaks
Guinea
2014–16
3,804
Survivals
1976–2012 Deaths
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Number of people affected
Source: World Health Organization.
clinical care for the swelling number of Ebola
patients. At the peak of its intervention, this non-
governmental organization employed nearly 4,000
national staff members and more than 325 external
experts to combat the epidemic across the three
countries. The WHO, in collaboration with Global
Outbreak Alert and Response Network—a network
of public health specialists, United Nations and
international health agencies, and nongovernmental
organizations—also responded to mobilize and
deploy medical experts to support local clinics once
the epidemic was officially declared.
Massive financial support also came through a
number of channels. The United Nations set up
the Ebola Response Multi-Partner Trust Fund to
mobilize funding and provide a common financing
mechanism. Over $166 million was raised from
members, nongovernmental organizations, and
private institutions. The WHO also received $459
million in donations from over 60 donors, including
the United States, the United Kingdom, the Euro-
pean Union, the World Bank, and the African
Development Bank.
The IMF was the first international financial
institution to provide financing to the government
budgets of the stricken countries. Within its man-
date, it acted swiftly to provide the authorities with
financial support, which was essential to sustain
the delivery of key government services, including
health care and education, while offering continuous
policy advice. Because the fiscal pressures warranted
a direct lifeline to government budgets, the IMF
decided to finance government directly—rather
than follow its usual approach of providing funds
to central banks to prop up international reserves.
The funds allowed the governments to spend on
measures to stem the spread of the disease and
protect critical social and infrastructure spending.
56 FINANCE & DEVELOPMENT | June 2017
Total Number of Cases (2014-16)
Liberia Sierra Leone
10,675 14,124
Survivals Deaths
The IMF disbursed a total of $378 million in
three phases beginning in September 2014, just as
the epidemic started to gather pace. As the gravity
of the situation became clear, and concerns about
the potential impact on the economy increased, the
institution went ahead with disbursing funds—even
though the evidence on the economic consequences
was not yet fully clear—judging that the risks of
inaction were simply too high. This sum included
almost $100 million in debt relief to Ebola-hit coun-
tries disbursed in March 2015, delivered through a
new trust that had been quickly created to aid coun-
tries hit by public health disasters.
In June 2016, the WHO declared all three countries
virus free and economic growth has started to strengthen
in Guinea and Sierra Leone. Recovery has not yet
occurred in Liberia, mainly due to the retrenchment
of activity and investment in the natural resource sector.
Lessons learned
The initial delay in recognizing the gravity of the
epidemic and taking appropriate action shows that
the world was unprepared for the Ebola crisis. Lessons
on how to strengthen health systems to be better
prepared to address catastrophic epidemics, at both
the national and the international level, are still
unfolding. It is clear, though, that the health systems
in these countries still need to be strengthened, with
the support of the international community—espe-
cially given the region’s high susceptibility to infec-
tious diseases due to the tropical climate. The epi-
demic also underlined the importance of early action
plans and decentralized early warning systems to
activate the health infrastructure and the global
response in a timely way. Contingency planning and
infrastructure investment—such as better sanitation
facilities and basic health care structures—can also
help prevent future crises.
 Cangul, corrected 4/19/17

Chart 2
Deadly epidemic
By the time public health authorities officially declared an Ebola outbreak, the disease had already spread to
neighboring countries, and the number of new cases began to rise sharply.
(newly confirmed cases) (cumulative deaths, thousands)
900 11/24/14 12
800 Newly confirmed cases
(left scale) Cumulative deaths (right scale)
10
700 Liberia
Guinea
600 Sierra Leone Sierra Leone
8
500
6
400 Guinea
300 4
200
Liberia
2
100
3/24/14
0
Cangul, corrected 5/3/2017 0
2014:Week1 2015:Week1 2016:Week1

Source: World Health Organization.

Chart 3
Lingering effects
Growth rates in the affected countries are projected to converge to a non-Ebola baseline by 2018, but the GDP losses
of the Ebola years will likely not be made up.
(real GDP growth, percent)
Guinea Liberia Sierra Leone
20 20 25

15
15 15
5
10 10
–5
5 5
–15

0 0 –25
2013 14 15 16 17 18 2013 14 15 16 17 18 2013 14 15 16 17 18
October 2013 forecast October 2014 forecast Actual and latest forecast

Source: IMF staff calculations.

From an economic perspective, the experience
underscored the need for flexibility and speed in
formulating a response. When government revenues
fell, the right response was more spending to coun-
teract the negative impact of the epidemic on the
overall economy, despite the decline in revenues.
But such policies to fight recession require rapid
financing—and this is why it is so important for the
international community to provide quick, massive,
and coordinated financial support.
Although global coordination and support are
necessary, success depends on the leadership of the
affected countries themselves. In Liberia, the tide
turned after President Ellen Johnson Sirleaf asked
tribal chiefs to persuade their people to abandon
traditional burial customs. Strong leadership also
helped communicate the importance of safety
measures and sanitary practices to change behavior
and prevent the transmission of the virus. But in
all three countries the resilience and adaptability
of the people were the key factor in the success of
the combined efforts of the national authorities
and global community.
CARLO SDRALEVICH is an advisor and MEHMET CANGUL and
INDERJIT SIAN are economists, all in the IMF’s African Department.

June 2017 | FINANCE & DEVELOPMENT 57

 BOOK REVIEWS
Free Trade,
Closed Doors
IN MARGARET PETERS’ Trading Barriers: Immigration
and the Remaking of Globalization the author
documents and investigates several new facts
regarding the relationship between international
trade policy and immigration policy. Her primary
argument is that over long periods of time and
across a diverse set of countries freer trade leads
to tighter immigration policy, a message that
Peters supports with an intuitive story and an
impressive collection of data.
Peters’ main argument is novel and straightfor-
ward: in the United States and other relatively
well-off countries, international trade may reduce
Margaret E. Peters
Trading Barriers:
Immigration and the
Remaking of Globalization
Princeton University Press,
Princeton, NJ, 2017, 352 pp., $95
the demand for low-skilled workers, including
low-skilled immigrant workers, and this will there-
fore make firms less likely to lobby for less-restric-
tive immigration policies. Thus, freer international
trade directly reduces the demand for low-skilled
immigrants while also indirectly turning domestic
policy against them.
Peters, a University of California, Los Angeles,
political science professor, begins by examining
the trade-offs that have shaped politicians’ and
firms’ views on immigration and trade policy
58 FINANCE & DEVELOPMENT | June 2017
around the world over two centuries. To do this,
she gives an impressive descriptive account of
government policies across 19 diverse countries
(some OECD members, some in the Persian Gulf,
and some in east Asia). She combines this account
with data on advances in transportation technol-
ogies that have eased international trade. She first
presents graphic evidence that immigration and
trade policy have diverged over the long run in
many of these countries and then shows that as
immigration policies tighten, trade policies relax,
even in the short run.
Peters then lays out the intermediate steps of
her argument, showing that the intensity of indus-
try lobbying on immigration legislation is sys-
tematically related to the exposure of the industry
to freer trade. Focusing on the United States, she
exploits differences in the degree to which firms
in a US state are exposed to trade and asks whether
these differences can explain voting patterns in
the US Senate. In line with her thesis, she con-
cludes that they can.
While Peters sometimes exaggerates the strength
of her empirical results, the consistency of the
findings across different contexts should be deeply
informative for those who negotiate trade and
immigration policy. If we cannot have both freer
trade and freer immigration, we should choose
carefully between the two.
Finally, let me offer a quibble with the eco-
nomic theory that is intended to provide a frame-
work for the book’s narrative. In short, I feel
that Peters could have gotten more quickly to
her findings rather than describing in so many
words, and in such detail, the various possible
mechanisms through which trade, immigration,
foreign investment, and technology may be
related. This is ultimately an unsatisfying middle
ground—a detailed exposition that neither rises
to the status of a formal model nor serves as a
quick overview—that leaves an academic audi-
ence questioning the claims and assumptions
being made, while likely providing far too much
detail for the casual reader.
But all in all, the book is well worth reading
and should bring a new and influential per-
spective to the ongoing debate over trade and
immigration policy.
GREG C. WRIGHT, assistant professor, University of
California at Merced

The Crusty
Professor
IAN KUMEKAWA HAS written a useful guide to the
thinking on welfare economics of the British econ-
omist Arthur Cecil Pigou, who held the Cambridge
chair in political economy—preceded by Alfred
Marshall and followed by John Maynard Keynes.
Part exposition, part biography the book illumi-
nates economic thinking in the 20th century, and
the role of Cambridge in particular. In pre–World
War I Cambridge intellectual circles, as in Keynes’s
own thinking, there was an interest in applying
ethics and ethical judgments to the study of eco-
nomics, which drew on a strong tradition of liberal
paternalist reformism. Kumekawa neatly traces the
trajectory of that thought from optimism about
solving social problems through knowledge and
science in the pre-1914 world to increasing doubt
and pessimism following the first world war and
profound bitterness after the second.
Like Keynes, Pigou was a pacifist, but he expe-
rienced the horrors of war while working for the
field ambulance service and when conscripted he
seems not to have wanted to register as a consci-
entious objector. The Great War transformed him
Pigou believed in the consensus
of the great and the good.
from a gregarious and convivial bachelor don into
an increasingly lonely figure. By the 1930s, he felt
that the new Cambridge of Keynes was overtaking,
deriding, and ignoring him, and he never really
recovered from Keynes’s unfair portrayal of him in
the 1936 General Theory as a straw man for outdated
classical economics.
Pigou believed in the consensus of the great and
the good, and sometimes even sacrificed his strong
views on issues such as free trade in the interest of
harmony. Keynes’s position as a combative public
intellectual appalled him. He thought that dissent-
ing reports were “ungentlemanly.”
Kumekawa rightly presents Pigou’s analysis of
taxes as the best way to deal with externalities
as relevant for today’s environmental issues.
BOOK REVIEWS
Ian Kumekawa
The First Serious Optimist:
A. C. Pigou and the Birth
of Welfare Economics
Princeton University Press,
Princeton, NJ, 2017, 344 pp., $35
Carbon taxes are a fine example of a Pigovian
tax, which matches producer costs, for instance
through pollution.
The book does not present a sympathetic portrait
of Pigou the man. Kumekawa explains that “though
Pigou set out to help the poor, he did not respect
them,” and he “saw broad segments of the popu-
lation as totally unfit to make even minor deci-
sions.” It was high 19th century paternalism at its
worst (and misogyny too—there is a chilling
account Pigou’s attempt to freeze Joan Robinson
out of a Cambridge lectureship).
Surprisingly, Kumekawa misses the strand of
Pigou’s thought that is most relevant today and that
anchored his thinking about damage control and
the protection of resources. More than his contem-
poraries, and perhaps surprisingly for a childless
bachelor, Pigou cared deeply about intergenerational
fairness. Current generations’ strong incentive to
pass along costs to their successors drove much of
his thinking in welfare economics. He argued in his
1932 Economics of Welfare for intervention by the
state, which is the guardian of those who are not
present. “(…)the State should protect the interests
of the future in some degree against the effects of
our irrational discounting and of our preference for
ourselves over our descendants.” That surely is a
modern message, even if delivered by a crusty
Edwardian professor.­
HAROLD JAMES, historian, Princeton University and IMF
June 2017 | FINANCE & DEVELOPMENT 59
 CURRENCY NOTES
A Pretty Peso
Colombia showcases its rich culture on the newest member of
its family of banknotes
Nadya Saber
“NO, [I’M] NOT RICH. I am a poor man with money,
which is not the same thing.” Colombian Nobel
laureate Gabriel García Márquez responded when
asked about his literary fortune. The late García
Márquez, affectionately referred to as Gabo, is now
the face of Colombia’s second-highest denomina-
tion—the 50,000 peso banknote—as part of the
new family of banknotes series launched by the
central bank in 2016.
Colombia on the rise
Colombia—Latin America’s fourth-largest econ-
omy—has experienced strong economic growth over
the past decade, partly thanks to favorable demo-
graphics and the commodity boom. With robust
exports like coffee, oil, textiles, electricity, soccer star
Radamel Falcao, and singer-songwriter Shakira,
PHOTOS COURTESY OF THE CENTRAL BANK OF COLOMBIA
Top: Nobel Prize winner and father of magical realism Gabriel García Márquez is surrounded by butterflies, just like the
character Mauricio Babilonia from his most famous book—One Hundred Years of Solitude.
Bottom: Colombia’s 24th president, Alfonso López Michelsen’s, close-up has 3-D effects on the front of the 20,000 note.
60 FINANCE & DEVELOPMENT | June 2017
Colombia is a rising player on the global stage. Despite
serious challenges—including poverty, inequality,
drug trafficking, and displacement of indigenous
communities—Colombia is moving forward, not
least by ending the armed conflict that has devastated
the country for nearly half a century.
New beginnings
As Colombia progresses on a trajectory of healing
and growth, the country has issued new banknotes
that pay tribute to former presidents Carlos Lleras
Restrepo and Alfonso López Michelsen, anthropol-
ogist Virginia Gutiérrez de Pineda, poet José Asun-
ción Silva, painter Débora Arango, and national
literary treasure García Márquez—influential
Colombians who have shaped the country’s cultural,
political, and scientific landscape.
José Darío Uribe, former governor of the Central
Bank of Colombia says, “the new family of banknotes
responds to the needs of the economy, pays homage
to outstanding personalities of the country, and exalts
our biodiversity, turning it into the new image of
our banknotes.”
Noteworthy features
The new banknotes, which circulate alongside the
old ones, feature special characteristics like inks and
security threads with color changes and 3-D effects,
microtext (small text that protect against forgery),
hidden figures, and tiered sizing and touch-sensitive
elements for the visually impaired. The new elements
strengthen the currency’s security by integrating
leading-edge technology and address the needs of
people with disabilities.
The central bank ran an educational campaign
with free training sessions on the new notes’ security
features. The campaign advises people to “look,
touch, lift, tilt, and check” to highlight the security
features and designates each action with a corre-
sponding color. For example, “lift” is associated
with yellow and how the note interacts with light,
and “check” refers to examining the note under
ultraviolet light.
 The bank also introduced a new high-denom-
ination—100,000 peso—banknote to meet the
needs of the growing economy and rising incomes.
Reinforcing the biodiversity theme introduced in
2012 with a new coin series, each banknote offers
a glimpse into the country’s diverse geography. For
example, the 50,000 peso note features the Sierra
Nevada de Santa Marta mountain range and a hum-
mingbird feeding from a flower that changes color
when you tilt the note. The 100,000 peso note
includes an image of the Cocora Valley located in
the Andes by the Quindío River. The area has been
protected by the government since 1985 to prevent
the extinction of the prominent Quindío wax palm,
the country’s national tree.
Images referring to indigenous culture sprinkle
the new notes, like the ancestral Amerindian Zenú
tribe earring on the 20,000 peso note and the terraces
of the Lost City central to the Tayrona culture on
the 50,000 note.
Winner takes all
A 2016 nominee for the International Bank Note
Society Banknote of the Year award, Colombia’s
50,000 peso note featuring García Márquez is a
finalist among 18 revamped banknote contenders
from around the globe.
Front: On the 2,000 peso banknote, Painter Débora Arango stands tall as Colombia’s pioneer of modern art.
Back: Caño Cristales, heralded as the river of five colors, shines through the inks and threads of the 2,000 peso banknote.
García Márquez’s legacy—bringing Latin America
to life through the pages of his poignant prose and
giving the world a glimpse of the Colombia he
loved—shines through the violet undertones of the
50,000 peso note. And an excerpt of his Nobel Prize
acceptance speech is also featured on the bill.
It’s no surprise then that everyone is talking about
the Gabo banknote—especially on social media.
Run the search #Gabo and you are likely to find
countless posts not only praising the author’s
banknote, but also asking how to obtain one.
Colombia’s new family of banknotes is cause for
celebration—proving that the country is ready to
cash in on its history to bank on the future.
NADYA SABER is on the staff of Finance & Development.
June 2017 | FINANCE & DEVELOPMENT 61
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